One might assume a firm would know whether it was a founder-centered firm. However, many founders and successors are too busy to notice. Or maybe they don't really care.
If you want to determine whether a firm is founder-centric, the first place to look is often the founder's family. They will know the answer.
To confirm or determine whether a firm is founder-centric, we suggest a founder ask him or herself the following four questions:
1. When was the last time I took a week of uninterrupted vacation?
2. Have other members of the staff ever run client meetings?
3. When a bad event happens in a client's life, does the client only call the founder?
4. Do employees have the opportunity to make company decisions, or does everything go through the founder, even, for example, how the company handles a holiday party?
You get the idea; most people can stop at the first question.
A successful transition process requires a keen sense of awareness on the part of both the founder and the successor. We studied extensively the way successors and founders can increase their ability to gain insights.
Gary Klein, in his 2013 book, Seeing What Others Don't: The Remarkable Ways We Gain Insights, lays out the foundational differences between gaining insight and missing it:
Flawed Beliefs: We can all fall prey to basing our decisions on flawed beliefs. The flawed belief that consumers wanted a new taste in soft drinks led to the disastrous rollout of New Coke in 1985. MySpace's flawed belief that it had created a superior technology platform and a high barrier for competitive entry led to the dismissal of Facebook as a worthy competitor. Facebook, in March of 2015, sits with a $232 billion market cap, and few people now even remember MySpace. Decca Records' flawed belief that four-piece bands were no longer the future of music led to their refusal to sign the Beatles, the most famous band of all time. Of course, nobody intentionally bases their decisions on beliefs they know to be flawed. Hindsight is always 20/20. The only way to overcome flawed beliefs is to shed light on their shortcomings. We use our research and experience to shed light on some flaws in founder and successor thinking throughout this book. There are three fundamentally flawed beliefs associated with founder-centric firms, which an industry leader described simply as “absolutely wrong.”
The first flawed belief of founder-centric firms is “Nobody can run my firm the way I ran it.” While, of course, nobody is going to run a firm exactly like the founder, successful firms don't need to be run exactly the same way. There are plenty of successors with more than enough ability to replace founders in the transition of firm management. Their accumulated insights and fresh perspective may make them even better at the task. Philip Palaveev is CEO of the Ensemble Practice LLC, a business management consulting firm focused on the evolution of team-based advisory businesses. He uses this analogy: “Founders not expecting changes to their businesses is a lot like selling your house and expecting the new owners not to remodel it.”
The second flawed belief is “The young people can't afford to buy me out or don't want to take the risk to buy me out.” If the founder can sell the vision and be reasonable, successors will buy.
The third flawed belief of founder-centric firms is “My firm is worth five times revenue because that's what I saw in the latest trade magazine.” There's no one-size-fits-all methodology to determining firm value, but this raw comparative methodology often ends up with a delusional valuation, making it next to impossible to transition ownership of the firm.
Lack of Experience: Dr. Klein's research studied 120 cases of material insights, where one individual missed a situation while the other nailed it. Two-thirds of the insights in those cases depended on experience.
Many firms remain founder-centric because of inexperience, on both sides, in going through the transition process. This is almost certainly the most important business decision a founder ever makes. Getting it wrong can be catastrophic. And it's hard to do a trial run. The same inexperience in the face of critically important decision making is true for a successor as well. But, at least, first-round successors can learn from this to better facilitate their own transition of ownership and management to their successors. In any event, the stakes are very high and the experience levels are very low. That pressure leads many firms to do nothing.
A Passive Attitude: For many founders, transition is on their “important” list, but it's not urgent. In doing research for this book, we talked to founders who asked why they should care. “Why isn't the status quo okay?” It will take us the entire book to thoroughly answer that question, but here are some of the counterinquiries: Do you care if your clients will continue to be well-served through the indefinite future? Do you care if your firm has true equity value – for yourself and for others? Do you care about your durable legacy?
These questions are nearly impossible to answer if founders have a passive attitude about the transition process. So we urge founders to take an active stance, to start thinking seriously about what this journey will entail, and to actively address truths about founder-centric firms.
Management as Distinct from Ownership: This is one of the most fundamental insights that successful transitions deploy. Ownership is about value, dividends, and ultimate control. Management is about responsibility, performance, accountability, and compensation. The two dimensions are always united in founders; they can be separated in successors – at different times, in different measures, and through different persons. As Tim puts it: “Management is a job, ownership is a status; when the two combine, well, it's a happy coincidence, but the combination is not necessary”.
No Successor: Good successors are patient and respectful of the founders of firms, but they won't sit still indefinitely. Founder-centric firms lack the organizational foundation for growth and provide little opportunity for successors (of several future generations) to develop talent and build personal wealth.
Paralyzed by Indecision: Many founders are stuck in a tough position: They don't really want to work as hard in the business as they used to, but they aren't going to move on from what they currently have until they decide what they want to do next. The emotional journey of running away from something versus running toward something can take its toll on both the founder and the successor. Founders may not want to keep the firm founder-centric, but they feel paralyzed with indecision.
Driven by Greed: Founders and successors trying to maximize every last penny from the past or future valuation of the business will not be successful in transition. Firms whose people harbor unreasonable valuation expectations – either much too high or much too low – will not transition.
No Legacy: The legacy of a founder-centric firm is limited to the charitable goodwill of the founder. A founder-centric firm can be financially generous, but the legacy stops there. The lack of transition leaves the clients and employees wanting but not getting more.
No Glass Elevator: In the final scene of the movie Willy Wonka and the Chocolate Factory, as a reward for his honesty, Charlie is granted a ride in a magical elevator. This magical elevator goes up the shaft and breaks through the ceiling, flying Charlie around the sky and giving him a different perspective. He's no longer constrained by the physical structure. Founder-centric firms have no glass elevator, as they are constrained by their business models. Founder-centric firms have limited leverage, driven by their capacity constraints. These constraints come as the founder either maxes out capacity or decides he or she wants to focus more on his or her own life than on the business. This lack of capacity leads to decaying growth.
Missing What Drives Value: Mark Tibergien, CEO of Pershing Advisor Solutions, discussed with us a very simple concept founder-centric firms fail to understand. “Valuation is a function of the future.” The lack of a sustainable growth model in a founder-centric firm diminishes the equity value of a firm…perhaps to zero. It's easy to see how founder-centric firms, focused just on today, can miss this reality. Without