Shownotes
There are about 75% of closely held family business owners in the country. Yet, 85% of those have not completed the transition and succession plan. As a result, 25% of businesses close while others have to sell, cutting their family ties and emotional investment with it. Lisa Niederman, managing director of Speed2Results, talks about the importance of planning for your destination and preparing your business for succession. Sharing her own story and background in psychology as well, she discusses the state of owner readiness and the common problems with business owners. She also covers the processes of transition—from selling to buying—and the need for value drivers.
The State Of Seller Readiness In Family Owned Businesses with Lisa Niederman
We’re incredibly fortunate. We have Lisa Niederman. She is the Managing Director of Speed2Results. Lisa, thank you so much for allowing us to come into your home.
Bob, what a pleasure. I’ve been excited about doing this interview with you and I’ve heard all about it. I’m ready to get started.
Lisa, tell me about your business and who you serve.
Speed2Results is about focusing on closely held family-owned businesses in transition. It’s particularly working with the owners, the rising generation, the nonfamily executives, and the partners in helping them look at the emotional and behavioral challenges that they’re experiencing with succession. There’s a lot of succession going and continuity. How do you grow the business? How do you create that legacy and getting it ready for sale? We call this seller readiness. It’s the people side of the transition journey that ensures improvement in value drivers and optimum valuation.
For the folks in our audience, they’re going, “What is that entire touchy-feely thing?” I don’t think they’re aware of the statistics for the quantities of businesses that come to market that don’t sell. Can you share some of your experience and understanding of basically the state of owner readiness?
There are about 75% of closely held family business owners in this country. 85% have not completed a transition plan and that succession we’re talking about. 50% haven’t even started. Out of that, 75% regret it when they do sell because they’re not prepared. They spend approximately the next eighteen months in depression and anxiety, trying to find themselves because their identity was tied to their business. 25% of the businesses only close. That’s not much. When we talk about seller readiness or the emotional and behavioral side of getting the business owners ready, I know that sounds a lot of gobbledygook, it’s not. If you think about it, it’s the glue that makes that transaction or succession work and people aren’t paying attention to it.
We’re living in a volatile market. We don’t know what’s going to happen.
They’re paying attention to the advisors, the valuation, the attorneys, the CPAs, the investment bankers, and business brokers. What happens when the people side falls apart? What happens when the owner isn’t psychologically ready? They’re controlling. They’re a know-it-all. They’re not ready yet and they think they can do it in another three to five years. We’re living in a volatile market. We don’t know what’s going to happen. People think that they still can sell their business. They still have a right to sell their businesses. Nobody has a crystal ball. We don’t know that. You don’t know what’s going to happen if it’s a family business. What’s going to happen with your siblings and your cousins when they want out? Those are some of the issues that we’re talking about when we’re talking about emotional and behavioral challenges. That is what you have to address in order to make the continuity succession or the sale work.
You’re passionate about what you think about that. Let’s back up a little bit and talk about what led you down this path.
It goes back to my family. We were a family in a business. My grandfather started a furniture business and he had two sons, my father, and my uncle. They ran the business and it was on the south side of Chicago. It was a high-end living room furniture business. It was extremely successful. What I got to watch was my two older brothers got to go down and work at the factory. This is literally a factory on the south side, manufacturing firm, hammering nails into the furniture. We would go down there as kids, myself and my younger brother, and play on the factory floor, get chased out of there. I got to watch everything that was going on.
I tell this story because my father was a patriarch in our family. Everybody would go to him for his wise counsel. If there was any problem they would go to him. When I went down to the factory and I saw how he managed people, that made such an impression on me. In those days, in the ‘50s, ‘60s, ‘70s, it was an autocratic, militaristic and hierarchical model. You told people what to do. It wasn’t collaborative. It wasn’t team-focused. Here I am sitting, watching my father and my family, and then watching him as the boss CEO of this business. There’s a dissonance that’s created and I’m going, “There’s got to be a better way to do this.” That’s a phrase I’ve always said in my life. I’ve always come in and maximized what can we do, how can we do this better? That propelled me into a whole field of psychology, that whole practice in behavioral psychology before I came to business. That’s where I set the goal of combining psychology in business.
That business sold twice. In each of those, I was privy to the discussion. I wish I was a little bit older with the knowledge I have now. Back then I was so impressionable and I was listening to all these conversations. My father was a visionary in those days and I didn’t even know it. They were talking about mergers and acquisitions in the ‘70s. We only started talking about that in the ‘80s and ‘90s. I grew up in this family business that sold twice and it propelled me into this whole field of psychology. We’ve said, “I’m going to go get great at people first and then I’m going to come back to business and I’m going to integrate the two.” That’s what I’m made of. That’s what is in my DNA.
You grew up in business. You sat at the knee of the patriarch and learned. You got to see him sell it twice. There must’ve been a reason he sold twice. One probably didn’t work well. He got it back and sold it again perhaps. That would be the story that we’ve heard many times with business owners who did a failed sale, particularly when they’re carrying part of the note. As you look at business owners, what are the top one or two things that you think are the biggest holes in their bucket now?
Family Owned Businesses: Business owners are moving so fast that they don’t think about their destination, where they are headed.
Business owners are moving so fast. Everybody talks about the speed of business. The problem is they’re not slowing down and working on their business. They’re busy growing it and we’re in boom times. Everybody’s talking about it, “I’m working on my business. I don’t need to worry about the valuation or what I’m going to get.” The problem is they’re not taking a couple of hours a week and looking at where they’re going. What is their destination? They’re not working on their business. I know your audience has heard this before. The thing is they’ve heard it before, but are they acting on it? Most people are not.
Why do you think that is?
It goes back to the speed of business. People are moving so fast, “I don’t have time to do that. I’ve got to do my next acquisition. I’ve got to get this next client. I’ve got to get this next proposal lot.” They don’t have the time to sit down and think about, “I am executing,” and there’s a lot of discussion on what is execution, but what are you executing against? Do you know your destination? I ask people that and a lot of the time they don’t.
Most of the folks think they’re immortal and, “That’s not going to happen to me.” That’s the typical thing, “It won’t happen to me.” Death and disability change the value of your business upon the event. You’re the business. Do you think that when you talk to your clients that they consider that risk level much?
They don’t because they think they’re omnipotent. As you said, “I’ve got another three to five years, I’ll handle it in three to five years,” then I get to another five years. “I’ll handle it in another three to five years.” It goes back to our denial about our mortality. It’s our mortality that our life is going to come to an end. Even with my own father, he was in the business until he was 79 and it took three people to replace him. I see that all the time. The owners and the founders go, “I’m not ready. I’m having too much fun.” What they’re not counting on is disability, illness and then you’ve got the rising generation going, “I’m ready, dad. I’m ready, mom. I want to do this. Let me do this.”
Death and disability change the value of your business upon the event.
The problem with that is if they don’t pay attention to nurturing them at least five to ten years out. I know your audience is going, “Five to ten years out. Who has that time?” Ideally, that’s what you want to take is five to ten years out. If you don’t start nurturing them, educating them, even as little kids in money, finance and giving them exercises, if you don’t do that, your talent is going to go somewhere else.
It’s the old apprentice notion. I think about business and cycles. Like many things in an upmarket, anybody can do it in the market. When you talk to your clients, do you think there’s a concern if they start doing this planning that their employees might go, “They’re going to sell their business?”
Typically, they don’t know about that. If most owners are talking about selling or transitioning, they don’t want their employees to know. There are different perspectives on letting your key employees know, but that depends if it’s an outside sale, an internal sale.
If you’re 70 or 75, the employees have got to know.
They’re sitting there going, “I know there’s going to be some transition. What are the employees worried about? Their jobs, their family, their security and even though it’s been good for them, what are they going to do next? It’s not good for the current employees not to know that.
In your experience when you go through your process, the business owner basically goes, “Yes, I’m going to drink the tea, I’m going to follow the process.” What is the typical outcome that that business owner observes when they get to the end of the process?
Basically, what they’ve done is they’ve identified the value drivers and they’ve improved them so much that the valuation has gone up at least 50% and that’s what people want. It’s not another process to go through. It’s not another succession. It’s not another theory because what are business owners concerned about? Money. At the end of the day, it’s about money, security, legacy, how I’m going to take care of my family, and my next gig. I know that’s hardcore but it comes down to money, family, and security.
For the business owner, some business owners might consider this type of process a debt expense. I don’t believe they see it as an investment. Yet when you take a look, maybe you can elaborate on what the potential buyer is considering when he looks at one business that has gone through the process versus the business that hasn’t. What is that potential acquirer thinking between the two?
A lot of buyers are seeing a ton of businesses out there. That means there are a lot of sellers competing for buyer dollars and we know there’s a lot of dry powder out there. At the same time, the buyers are looking for prepared businesses. If your business isn’t prepared, they’re going to go, “Next.” They’re looking for simple things, they’re not simple, but is your IP protected?
What is IP?
Family Owned Businesses: It’s a buyer’s game. They are either going to invest more, make acquisitions, or stabilize the business, take the money out, and invest it in retirement vehicles.
Intellectual property. Do you have a buy-sell agreement? Is it funded? Do you have life insurance for key people? Those simple things, your processes, and systems. If you don’t have some of those basics, they’re going to go, “Next,” and go onto the next one because there are many businesses available for sale, starting from $250,000 all the way on up. Our business deals with $5 million on up. Why? It’s because they’re in transition, they’re growing. They’re either going to invest more, they’re going to make more acquisitions, or they’re going to stabilize the business, take the money out, and invest it in retirement vehicles or legacy vehicles of some sort. It’s a buyer’s game. They’ve got that opportunity to choose and select.
The business owner, from my perspective, they have a notion of what they think their business is worth. Where do you think the typical business owner is getting that type of information?
They’re looking at their neighbor down the street, “My neighbor got that so I should get that.” They’re comparing and it’s not based on anything. They’re not being realistic about practical information of what their business is worth. I’ll bring up something that a lot of business owners don’t trust valuations. They think it’s an art more than science and that comes up quite a bit. In the beginning, when we do our seller readiness process, we integrate it with a benchmark valuation. That benchmark valuation is about improving those value drivers. Why do you want to improve those value drivers? That can be customer segments we’re talking about. It could be your processes that are unique to your business. Your audience is familiar with that, but why is it important? It’s going to drive your valuation in the end.
For the potential business owner/client that’s in the audience, they said, “Yes, we want you to come in.” What should they expect day one from you?
At the end of the day, it’s about money, family, and security.
Day one, we put them through what we call Seller Readiness Assessment. That assessment is a checklist. Everybody has their own checklist. Our checklist has been researched over seven to eight years and it goes from strategy to human resources to talent to accounting to life insurance to valuation and so forth. The beauty of what we do is we’re not just making a check if you want to sell in three to five years. What we’re doing is we’re doing a deeper dive in the debrief meeting and we’re asking, “What’s getting in the way of making a timely decision in order to execute?” That’s where the emotional and behavioral challenges come in because people can be uncertain, they’re unknown, and they don’t know what they want to do. If you can help them identify those things, you can begin to execute even faster. You make the decisions and then you execute and then you can hold them accountable.
They go through this whole seller readiness assessment integrated with benchmark valuation. They do know what the business is worth. They get a debrief meeting. They get an executive report that basically says, “Here are your value drivers and here’s the priority based on our discussions of what we should go after in the next couple of quarters,” and it’s prioritized. What I’ve noticed is with other advisors, what happens is the business owner comes out of these meetings and their eyes are glazed because they’re overwhelmed with all the information. This is where my behavioral psychology background comes in because I know you’ve got to chunk it down to three things that you need to do. You have to make them specific and measurable so you can identify when you’re successful. It’s not unlike the smart goals.
That’s no different but what we’re bringing to the table is that deeper dive and understanding what’s getting in the way of that execution. They go through that and then after that, I refer them out. I’m generous in my referrals. I have a whole Seller Readiness Advisory group that has attorneys, CPAs, valuation people, insurance people, business brokers, and investment bankers. I’ll refer to them directly. Typically, business owners have their own advisors. That’s okay, these are second consults. All they’re doing is providing education to them. If they want to continue with me in the second phase, what we’re doing is growing the business and the people side so we can provide that need. It could be to the CEO or the president, the executive coaching development, building that management team. Where do we need to drive that management team because 50% of evaluation is the management team?
I’m busy running my business and I go, “I don’t know why I need an executive management team. I’ve got it handled. I can do it. I’ve been doing it forever.” From the potential buyer’s perspective, what does that do if I’m the guy?
I was going to go in a different direction with you. They’re taking an internal perspective and that’s part of the problem of small business owner too because when they have an internal perspective, they think they know it all. They’re not sure what their business is worth or what they can do in the marketplace. They think they know it all and that’s also a concern with family businesses. It becomes insulated with family business members. With their knowledge and their talent, they haven’t brought anybody else in to shake up the culture for innovation and problem-solving. They may need to change their product next or their service next.
Family Owned Businesses: Part one of the transition is continuity and legacy.
When you have a business owner and you are the guy, I’m running a business and go, “Why do I need to build a management team when I got this handled? I’m young enough. I
