Throughout this series, we have been discussing how to successfully transfer organizational knowledge and business savvy to your next generation of leaders. Whether you intend to sell to your employees or not, transferring knowledge is a way of empowering staffers to become better in their roles and make them more valuable to the next leadership group, whether themselves or others.
In this last installment, we’ll talk about moving new leaders into actual ownership, whether they’re purchasing part or all of the company. Where the first four steps in this series could apply to most organizations, this last step isn’t for everybody.
When they start weighing their options for selling, many CEOs ask these questions:
• Should I give stock to the next generation of leaders? Or should I sell them stock?
• If they don’t have the resources to buy it, should I lend them the money? If so, what does that do to my relationship with them?
These kinds of questions tend to raise the tension level in a room, in large part because the relationship is not one of equals. To put it simply, you own the place, and your next-generation leader does not. So how do current leaders and owners put themselves on the same side of the table as these young leaders to help them get their start?
When preparing to sell my company to employees, I introduced the future owners to my banker and gave my personal guarantee for their stock loan. I did this once, and only once. Most young executives are house-rich but cash-poor, so this was the only way the transaction could happen.
It may sound crazy, but did that really put me at any higher risk than if I had given them stock? No. Did it put me at higher risk than if I had given them money? No. But you see, now we were joined at the hip regarding the future of our organization. When the company struggled, they struggled and worried about the future of our organization, just like we owners did. And if we were doing well, they were celebrating just like I was.
In other words, it put us on the same side of the table.
A Plan that Works
How many times have you seen this happen: A company owner says, “If anything ever happened to me, I could trust Fred to finish what I’ve started. He’s got my back. We share a brain. He understands the vision for the organization better than anyone. Besides me.”
The CEO invites Fred to become the next company owner ... and Fred declines.
Another scenario: Instead of going to Fred directly, the CEO consults with legal advisors about how to help bring Fred into the organization as an owner. They put together a ring binder with plenty of details and legalese. He hands it to Fred, who starts thumbing through it. The further he goes along, the less enthusiastic he seems. He is intimidated or, worse, he thinks he might be taken advantage of. What started as a compliment to Fred and his leadership ability has turned into something else.
We took a different approach. We started with a conversation. Think of all the business decisions that could occur during your tenure in this relationship. Then explore them.
Now is the time to start discussing all possible scenarios. For example, if I am a 90% owner and Fred is a 10% owner, can he prevent me from bringing in a new owner? Many would say no, because “he who has the gold makes the rules.” But the younger generation, Millennials and Gen X’ers will say, “Well, wait a minute. I’m a 5% or 10% owner. I don’t have any say in those kinds of decisions?”
The answer itself is not what’s most important. It’s having a conversation with all potential candidates to find out how they see these issues.
Another question to explore: “If I die, can my wife come to a board meeting?” If the answer is yes, then the purpose of the business is to support a family lifestyle. If not, then it feels like it’s the company first, then my family. Two very different scenarios, right? Again, the answer is neither right nor wrong. The important thing is to know where you stand. Context, transparency and dialogue are everything.
When I work with CEOs today, I usually start with about 50 questions, which often turn into 200. I interview each candidate individually. Here’s what I find: The ownership and candidate group generally align on about 70% of the issues raised. For the next 20%, we discuss and reach agreement. On maybe the next 10%, we never get there. In my company, I wanted to see commitment from the next generation of owners and leaders, and if I didn’t feel that, then we didn’t move forward.
Once we had agreement, we put it all in a white paper and took it to our legal team. They would develop a company-specific solution that reflected our culture and values. This lay a foundation for a successful ownership relationship into the future.
The first time we did this, it took about six months to reach alignment. Over the next 12 years, we invited others to ownership, resulting in 16 additional stock transactions. We chose these people using step two in this series: Identifying those with the will and ability to lead. We’d observe leaders who did a good job managing change in our company, and I would take them to lunch to discuss our ownership plan. If they were interested, I encouraged them to keep doing a great job, and invited them to the strategic-planning sessions where they’d have a chance to lead change at the tactical and strategic levels. After a year or so, if they continued to perform well at the strategic level, I took them to lunch again, and we would review a white paper about how we want to treat each other as owners. I shared the legal documents with them, and offered limited financial help to retain an attorney so they’d know what they were signing. Do you think this discussion and offer of financial help built trust? Absolutely. When they came back from their attorneys and told me they understood what they were signing and why, and what some of the stretch points would be, they were officially invited to be owners and complete the process.
Yes, there are risks involved in doing this. But as I see it, there are only two choices: We can rob from the future, or we can invest in it. We can take all the chips off the table for ourselves, or we can build a future on the foundation we have built.
In some ways, it would be easier to forget that you read this series of articles, and just keep on doing what you are doing everyday and thinking the end will never come. But think about the number of lives in your care. The decisions you make impact your family, employees, customers — and all their families. Being a business owner is a tremendous privilege. But it comes with tremendous responsibility.
Your legacy starts today. What are you planning to do about it?