Transcript
Speaker: Whether you're selling a business, scaling it up, or looking for a successor, every executive has to deal with transitions. We'll talk about them now. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Welcome to The Market That Moves America, the podcast that gives a voice to the growing middle market and drives a national conversation about its economic importance. I'm your host, Tom Stewart, the executive director of the National Center for the Middle Market. The US middle market comprises 200 ,000 companies with annual revenues between 10 million and a billion dollars a year. Collectively, they account for about a third of private sector employment and about a third of private sector GDP.
Speaker: The middle market is often overlooked by media, policymakers, academics, and others, yet our studies show that it's the fastest growing part of the economy. It's where about 40 % of all manufacturing is, and it's the creator of about 60 % of net new jobs.
Speaker: Today, we're going to talk about some critical issues in leadership for middle market companies. And in particular, we're going to talk about what it takes to make successful leadership transitions, handing over the reins to someone else, or deciding to sell, or even delegating responsibility in a growing organization. With me via Skype is Allie Taylor.
Speaker: who's an expert on this topic. She's both a practitioner and a scholar, a practitioner in her role at a firm called Orange Kiwi, and a scholar in that she's completing a PhD dissertation on leadership transitions in entrepreneurial companies. Allie, welcome. Thanks, Tom. It's good to be here. Tell me quickly about Orange Kiwi, and first of all, explain its name, and then tell me what you do.
Speaker: Sure. It's Orange Kiwi is really simple. I was born and raised in Orange County, California, and my partner is from New Zealand, hence the Kiwi portion of it. And we came together as general management consultants working with low to mid market business owners. And we kept seeing really consistent patterns that who the leader was really dictates their ability to
Speaker: scale their business successfully through some significant organizational development growth points that are pretty predictable. And it really came down to their leadership and who they were.
Speaker: So when you talk about scaling, what you're saying is that, I also said that we would want to talk about transition. So transition is handing over, but scaling is also a kind of handing over, isn't it? It's growing the company and building it. So these two issues are sort of intertwined. Yeah, we refer to it as transition. And there's three types of transitions that we look at, a scale, a sale, or a succession.
Speaker: Scale means I'm growing, selling, obvious, and succession means the business is staying in the same hands, but I'm handing it over to my partner, my daughter, my son, or just employees. And it could be an employee, whatever it might be. Well, you know, Sumner Redstone, who was the CEO of Viacom, once quipped that his succession plan was to live forever.
Speaker: And I guess we see that with occasional totalitarian leaders around the world that that seems to be their succession plan, too. And our own data that the National Center for the Middle Market has collected shows that succession planning is something that middle market executives do badly and know they do badly. Why is it so hard?
Speaker: Yeah, that's a great question. And your data is really congruent with a lot of lived experience and other research that's out there. And it comes down to a couple of factors. First, it starts with how they're wired and why they become entrepreneurs. And second, as they grow, they build the business so it's comfortable for them. So it's comfortable for their wiring and their psychological makeup. And so the people around them learn to behave in certain ways.
Speaker: And then pretty soon who they are, their self -identity becomes fused with their role identity and certain psychological needs are met through that role. And that makes change no matter what type of transition they're going to do, a scale, a sale, or a succession.
Speaker: Really really difficult because it goes to the very core of who they are So what I heard you just say something I haven't thought about before which is always good Which is that the issues of succession planning are partly? Mine, right? It's a person the individual psychology but also
Speaker: If I have created an organization, I've molded that organization to fit me. What's that line about the extended shadow of one man? I've almost molded an organization that fits me, so part of the succession problem is that I can't let go, and the other part of the succession problem is that the organization needs me in that spot. Yeah, that's a really great way to phrase it.
Speaker: When we're talking with owners, we explain it this way. We say a CEO that rose through the executive ranks to take on that position was shaped by the organization, who they are as a leader, how they make decisions, which is the foundation of leadership, and how they lead and grow the business was all shaped by the organization, by the external forces of the organization. For an entrepreneur,
Speaker: All that was shaped because they're driven through internal forces. They're the ones who are exerting force on the organization and allowing it to change or not around them. In other words, if I'm successful at this, the entrepreneur has built an organization that maximizes his or her strengths.
Speaker: minimizes his or her weaknesses, has—you know, covers it up or makes them unnecessary, has other people do it, whereas if I'm growing up in IBM or GE or Procter & Gamble, I become a company person. I become part of—the company culture changes me rather than the other way around. Most often that's true. Yeah, absolutely.
Speaker: So talk to me about some of these things that a person needs to do. I mean, if we talk about the person whose identity is all tied up in the business, and I can't draw the line between where I begin and the business leaves off, how does that person help untangle him or herself and start seeing the—
Speaker: seeing that transition is inevitable and making it work? Yeah, I wish I had a silver bullet answer for you. Unfortunately, because people are complex and complicated, there's no one right way to do it.
Speaker: But I will say that there is a good body of research out there that tells us there are four stages they have to go through. So it's a Beau Burlingham who wrote Finish Big, How Great Entrepreneurs Exit Their Businesses on Top, did the world a fantastic favor through his qualitative understanding of what the business owner goes through and the difference between those who are happy and those who are not.
Speaker: when his was primarily around exit. What we found is they also applied to their ability to scale a business. So there's a four -stage process and the most critical stage is their willingness to engage in robust self -exploration. And that exploration happens not just through 360 performance evaluations. Those are measurable and those are great from a business sense, but it's got to run on both rails.
Speaker: It's their own ability to look at their leadership and really to dig deep and start to create a sense of significance for themselves beyond the business and to meet certain motivational drivers and need for relatedness and competency and autonomy outside of just their role.
Speaker: So did I miss the four stages in there, or is that the first one? The willingness to engage in robust self exploration. Yeah. It is the first one, and it's also the most important. So let's stay there for a second, and then we'll get back to the next three. I just wanted to make sure. When I was at a Harvard Business Review, we published a terrific article by a guy named Robert Kaplan, who would exit Goldman Sachs, I think, which was,
Speaker: called Questions for the Face in the Mirror. Part of this was about questions about your own leadership style. But I like what you're saying about the questions of what kind of a person am I, how am I different beyond the business, and the personal questions
Speaker: How do you get there? I mean, is this something that needs an intervention? Or is this a maturation process? I sort of think that most people, by the time they hit some magic age, ought to be able to look at the mirror and kind of know who they are. But do entrepreneurs have a special problem in this ability to be introspective?
Speaker: I don't know if I would say entrepreneurs have a special problem. There are some unique characteristics of entrepreneurs that are different than the general population. But what I would say is we don't know what we don't know. So what we're finding is when entrepreneurs are hungry to learn and grow and the ones that are out there, they're in peer groups. They're in learning.
Speaker: mode where they're willing and open to see themselves differently, we find that those owners are more ready to change. Owners who have resisted things like external advisors and consultants, they don't join peer groups. They haven't read a book, a business book or a self -development book in years.
Speaker: Those are those owners really have what we're find is a lower openness to change And that actually a lot of research early research on openness to change came out of Ohio State University, huh?
Speaker: And we're finding that research really applies today to entrepreneurs. It's really a measure of how open a person is to change their behavior or to adopt new things. And I suppose that as an entrepreneur, I might sort of let the urgent of driving the business, getting more sales, growing, dealing with problems, all of those external urgencies might
Speaker: mean that I simply don't give myself the time to catch my breath and think. Yeah, absolutely. And what that does is it allows you to feel productive and it continues to feed that sense of significance because you're doing something. The question is that I think entrepreneurs can ask themselves is, am I doing the right things?
Speaker: So what's stage two? So I'm beginning to learn how to look in the mirror and like or not like what I see. I'm doing some robust self -examination. What's next? Yeah. So once they do that and they decide what they do and they don't want in any type of transition, then they start to think about what are the strategies that are going to get me there? So they go back. They've now identified their strengths. They've looked at their business.
Speaker: their finances and themselves and they've really created a vision for the future and what they want. Now they get to go to the strategic phase where they get to live in the fullness of who they are and the entrepreneur and what they really love is to figure out how to make it all work. A business plan for the next stage of my life.
Speaker: a business plan for the next stage of their life. Even if that next stage is golf and Scottsdale, that could be a business plan for how do I get to there or how do I get to the larger organization where I've got, you know, I'm delegating more responsibilities. But putting on the strategic head to think out the business plan for what I now figure out I really want to do. Absolutely.
Speaker: Absolutely. And then once they nail that strategy down on those three major levels for a business owner because their situation is very unique and they can't divorce themselves from their business, usually in the middle market because all their assets are all tied up together, then they get to move to execution. And this is where we see them either really excel because they've done the exploratory work or really get stuck because
Speaker: Change is hard and there are some major pitfalls of change. They're predictable and that's probably talked for another time, but there are five major pitfalls that they get stuck in. One of them goes right back to how open they are to change and can they put the right people at the table and lead them through it. That's the execution phase. For owners who
Speaker: who do the robust exploration, they have a good sense of who they are. They start to get really excited about where they're going. In this execution phase, they're well prepared for the pitfalls. The ones who didn't really do that exploration start to get hung up, and pretty soon, a lot of stuff starts happening what we call below the surface or below the waterline.
Speaker: where they start to get a little bit anxious or maybe look over the cliff edge and because they don't know who they are apart from their business or they don't know where their significance is going to be met, beyond the business, all of a sudden there is either self -sabotaging that happens or the tyranny of the urgent creeps back in or other challenges get in their way of succeeding.
Speaker: I might say I'm going to delegate responsibility to you, but I want you to report to me at five o 'clock every day about how you did it.
Speaker: Exactly, exactly. So I might sabotage not only myself but also sabotage the people that I've wanted to be, that I need along with me in that journey because I guess part of the transition is the realization that it ain't going to be me living forever and I actually am going to be handing over real responsibility to other people in a real way.
Speaker: Absolutely. And so then trust becomes a real issue, right? And for entrepreneurs as a group, there was another great article in HPR, I think it was back in 1985 by Kets De Vries, who identified that distrust is the default mode for most business owners. And you talk to them, they don't trust other people easily. And now they're having to deal with that issue. And they're having to trust people with their baby.
Speaker: Well, with their baby, with their financial future, with their legacy, with all of that. So talk to me a little bit. We don't have too much more time to talk together. But for this time, I want to come back to some of these others. But you mentioned groups or sort of institutions, you might think, that can help.
Speaker: CEO groups, boards of directors, advisors, best friends, family councils. In your experience, how critical are these and Marcus, how critical are these and what role should they play with an executive contemplating transition? Yeah.
Speaker: I'd say external voices are absolutely critical. We are the great deceivers of ourselves. So we need that external voice. How important they are depends on how well structured and designed they are. So a board of advisors or a family board or an executive coach or a peer group who can't tell the owner truth, worthless.
Speaker: but a group that can be objective and work with the owner and understand how to move them forward and what they need and be supportive and hold them accountable and build a partnership with that owner.
Speaker: invaluable, irreplaceable. I assume that gets back to that trust area, because on the one hand, I have to be vulnerable enough to trust you, but I also want to also be smart enough to realize that I don't want to just trust a yes man or a yes woman or a rubber stamp counsel. I want an exchange that really is a truth to power and the ability to be vulnerable too.
Speaker: Yeah. And I think one of the best groups an owner can go to is an owner who's already been through the process. Good point. There is no better source than for good and bad. Now, some are going to be toxic, of course, but but having that talk to owners who are really happy and owners who haven't really found their happiness beyond that. In fact, I think the research still is pretty consistent that 75 percent regret their exit within 12 months when they exit.
Speaker: Talk to owners who have been through some of those successions and what worked, what didn't, what are those red flags that you need to look for and then recognize that their experience isn't your experience and you've got to define it for yourself. Ali, this is fascinating. When's your dissertation going to be completed? I know that's a question one should never ask somebody who's working on a dissertation.
Speaker: I defend on August 4th. So it's in and you're up for your defense. That will be fantastic news. And I'm looking forward myself to reading it. And I'm hoping that we will be able to grab some pieces from it and put them on the National Center for the Middle Market website and explore this topic in a lot more depth.
Speaker: thank you so much for this i mean i think one of the things that we've learned first of all
Speaker: I'm going to live forever. I know that. But for everybody else, there are going to be issues of transition. And I guess that some of the critical insights are, A, recognizing that's going to happen and telling the truth to yourself about it, and then, B, recognizing that it's not going to be easy so that if you think about transition, you have to realize this is going to be
Speaker: emotionally challenging and there's gonna be a lot of levels of denial and so the importance then of getting a team around you so that you can do that right and then working through those stages from the self -examination to the actual making of the strategy to the carrying it out and then living into the world of transition. Whether you're handing over the business, selling it or
Speaker: transition in scaling, I think it's fascinating to realize that the emotional journey is kind of the same, whether it's handing it over or helping the business grow.
Speaker: Allie Taylor, thank you so much for joining us. Allie Taylor from Orange Kiwi. And thank you all for listening to The Market That Moves America. Never miss a new episode. Subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. And visit us at middlemarketcenter .org. And again, Allie, thanks very much. Thank you, Tom.
