This is part one of a two-part series on closely-held businesses and transition issues.
It’s so exciting and rewarding to start and run a successful business. During startup the founder eats, sleeps, and drinks the company, and sometimes either literally or figuratively the business is like the founder’s child. They are deeply emotionally invested in what happens there, and under their care and nurture and expertise the business grows. At some point down the road, for a variety of reasons, it becomes time for the business to make the transition from founder-led to professionally managed.
We are not implying here that founders are not professional. Professionally managed as we’ll talk about it here means creating an infrastructure of leadership intended to sustain and grow the business beyond any one person – for the company to become an ongoing entity in and of itself. Hiring Alternative HR is sometimes the first step that growing businesses take toward building the infrastructure, as they begin to add employees and need HR expertise without the cost of a full time HR professional in house.
There are several possible catalysts precipitating this transition:
- Founder is technically based – business is growing enough that the senior leadership needs to focus on more than technical matters. The founder prefers working in the business over the general management (working ON the business), and so looks to bring management resources in rather than choosing to invest his or her own time in roles that are not of interest, or that test the boundaries of the founder’s capabilities.
- Aging or ill health of the founder– The founder sees that at some point in the not-too-distant future he or she will want to or need to be out of the business and wants to develop a plan for a smooth continuation of the entity.
- Desire of the founder to shift their focus to other interests – Some founders start companies for the thrill of the creation process – once the company can run itself without their personal intervention they turn their heads toward other sources of excitement and stimulation. This might be travel, pursuit of a hobby, or the founding of another business.
This transition often doesn’t happen smoothly on its own, even when the founder is highly motivated to make the shift. Here’s why:
- It’s hard for the founder to back away from daily decision making. Sometimes it’s because their ego has been tied up in the business for so long that they cling to it for a sense of purpose and value. Occasionally they have a need for control over every aspect of the business. Sometimes they bring technical expertise that is substantial enough that they are still the go-to person for a solution in technical matters. In yet other instances they’re relying on the business to provide their retirement income and they aren’t completely confident that the company can succeed without them.
- The next generation of leadership isn’t prepared to take the helm. If it’s a family owned company and family members are the leadership team, things can get particularly hairy. Mom or Dad might have kept Jimmy or Sally from the big decisions because the founder parent has the strongest personality, and finds it hard to have confidence in the kids. Or it might be that Jimmy or Sally is only truly involved in the company because it was the career path of least resistance. In this scenario the next generation of leadership really does need to develop its skills before Jimmy or Sally can fit into the president’s chair without feet dangling.
- The company has been relying on personality rather than structure and process for its success. “When in doubt, ask the big guy” has been the M.O. The owner’s decision-making criteria aren’t necessarily widely known, or they might shift enough situationally that employees have learned not to make assumptions. They are in the habit of stopping and asking rather than acting autonomously. While the owner is active in the business the reliance on him or her can provide a sense of purpose. But when the founder is ready to exit, that reliance turns into a pair of handcuffs.
In part two we’ll talk about some steps that will help prepare the company and the key players for smooth transition.