Taking Over the Business
Stepping into the role of CEO of the business you acquire is the ultimate objective of your search. The skills that you will have developed and honed over the preceding 24 months as a searcher will quickly fade as you take on the new responsibilities of general management. For many searchers with no prior operating experience, this can be more frightening than the search process itself, which was well-suited to your analytical, communications and negotiation skills.
Unlike search, time is not your enemy as a new CEO. You are not taking over an enterprise that is in crisis, start-up mode or one that needs to be “fixed” right away. Resist the urge to announce the “new broom” that has swept into the business. It is important to spend the early years of ownership learning the business model in depth, understanding the competency and commitment of the employees, and listening to the vendors and customers you have inherited.
The biggest mistake searchers make is implementing changes too quickly and not taking time to fully learn the business from the inside-out. Your early mantra to employees should be “No changes for now, keep doing what you are doing”.
Looking outward from the business
While it is tempting to get right out and visit your major customers, this could backfire as they discover that you don’t know very much about them or your own business, and it may give them an excuse to evaluate other vendors. Within 6 to 18 months you will morph into the company’s best salesperson, but no need to rush into this by showing up ill-prepared to deliver on your promises or answer their technical questions.
Resist those early requests from your salesforce to “introduce” you as the new owner. No need to even highlight the new legal name changes. Your bank will cash your customer’s checks for a long time if still made out to the old company; forgo the urge to intervene. A rare exception was Ben Murray from New Forest, who needed to do some immediate damage control with his insurance company customers after he and Adam Barker purchased Cleanway Services.
When a customer gets wind of a change in management or control, they may become nervous and may wish to negotiate new terms of payment which could impact cash flow. If you are “sole sourced”, the customers buyer may use the opportunity to begin a dialog with a second source competitor. Tread cautiously around stirring things up too quickly; better to beg forgiveness a year later when you are much more knowledgeable and confident.
Similarly with your vendors and suppliers, tread softly at first. One of their primary concerns is your ability to pay and if they discover the size of the debt load you are carrying, they could easily reduce your credit line. Best to defer any requests for financial data until you have full year statements to show them. They may be uncertain of their own status with you, especially if they had a “relationship” with the old owner that was not strictly focused on quality, delivery and value. Within 6 months you should have a good understanding of the capabilities of suppliers that represent the top 80% of your costs. Only then should you consider making changes.
This is the perfect time to set expectations with your investors. Having been disciplined about your quarterly communications (See Blog Post – Reporting on your search progress), let them know that they can expect a timely report on your progress that corresponds with your board meetings, 30 days after the end of a quarter. Corresponding monthly with your banker is important in the early years to establish rapport as you strive to avoid triggering their lending covenants. Hopefully, you will avoid your lawyers and not need to re-open your legal documents for many years to come.
Early on, reach out to your support network with an announcement of the acquisition to show your appreciation for their help and keep them updated annually. This is also the time to construct a 3-5 person legal or advisory board constructed from your investor pool and outsiders who you feel can contribute. You will also need to cultivate new mentors, perhaps from within the industry or in parallel markets. Consider joining local or national industry groups to begin sharing best practices.
Maintain contact with active searchers to allow you to introduce them to those business owners who reach out to let you know they are now “ready to talk”. Sharing these leads within the search community is the way you can “pay back” the advice and support you received from those who preceded you. You will be busy, so guard your time carefully.
Your role in the community can be politely deferred as you get up to speed with the business. Expect curiosity about your level of engagement compared to the prior owner. Understand the key issues and relationships before you branch out. The seller will move to the Previously Important Person (PIP) status as you take full control of the transition (See Blog Post: Seller Transition). Since the seller is probably one of your debtors, and not a partner, you will want to maintain a healthy continuation of their involvement and/or a smooth separation.
Your employees will be watching
On your first day, keep your introduction short and simple. Find common ground such as discussing your family – everyone has one or interests in sports! This is not the time to opine about the vision, mission or the future. Certainly make no promises or commitments. Instead ask for help in learning how the business operates and what each person does in the business. Best to be understated, while showing confidence and enthusiasm to conduct “business as usual”. Avoid the “we” word, it is just too soon to assume that you are part of the “team” yet. It will have to be short meeting!
From their perspective, the most important thing on employees minds is their job, and you hold the answer to that. Communicating a “no change for now” message repetitively will help. Also, using this opportunity to say “I trust you to keep doing what you have been” will reciprocate in building their own trust in you!
Give some thought ahead of time to the small details of how you present yourself as the new owner. Your employees want to know what to expect from you. Decide on an appropriate wardrobe and be consistent about it. Be understated and not flashy. Consider some distinctive items like a colored pen, or a notebook for recording notes and holding people accountable. Decide how you want your office to be laid out by paying particular attention to how the prior owner worked. Determine your work hours and be consistent about them. Parking in the “back lot” and walking through the building to get to your desk sends a great signal to the entire organization Communicate your expectations around responsiveness to your email, phone and texts. Decide what to do about lunch – starting off eating at your desk is probably the safest until you understand the culture around the mid-day break.
Establishing a clear pattern of behavior early on that is dependable and not random will build trust. Be predictable and keep your emotions in check. Your first meetings will be observed carefully: did they start and end on time, was there agenda, did you have a way to keep track of commitments. Having a “system” for follow-up can have a huge impact on raising the level of accountability, with the concept of “trust, but verify”. Finding ways to show that you “trust” them to do the right thing pays off handsomely as the reciprocate their own trust in you.
Signing all the vendor payment checks is a great technique to review spending levels and become familiar with your vendors while being able to ask non-confrontationally about various aspects of the business. As with all you put in place, be ready to do it consistently for 6 months or more to reinforce consistency.
Be attentive for opportunities to take some early, low risk decisions. Celebrating failure rather than criticizing it will help encourage a safe environment around new ideas. Look for small, short term wins; but don’t take personal credit for them. Your words and pronouncements have much less impact during the early years. It is your actions that carry the most weight.
Not all things will go as planned. You may encounter a “hold up”, where an employee feels that at upon your arrival, you need to address their compensation level or they will leave. Follow your “no changes for now” mantra and delay this for 6 months or a year until you have had time to assess overall compensation levels and performance. If not, the there may be a line outside your office that forms very quickly with additional requests – everyone is watching you.
Begin to set the tone for a new culture
There are many ways to subtly set the expectations for the culture you want to develop over the first 3-5 years. Learn names, taking photos if necessary. Consider mandating visible name-tags for all; you may discover that not everyone has learned names either. Bypass the chain of command from time to time to seek information, but treat the organizational lines with respect. Gather input from your direct reports and managers, but from others as well. Let them know you want to hear their issues and what gets in the way of doing their jobs effectively.
Generally, employees don’t like change and are unlikely to leave within the first six months, although most searchers worry about this. Often times, they will be in shock of having a new owner, so be prepared to repeat what you say in your simple messages multiple times. Everyone will think you are rich, don’t worry about it, but don’t spend lavishly. Learn from them, be humble and ask for help understanding the history of the business.
Evaluate opportunities to “break the habit” and avoid setting precedent by repeating old practices. One searcher after a December 1st closing was faced with having to make year end bonus payments to all employees, a standard practice in the business, but never accrued for on the books nor did it come up in discussions with the owner. This was a great opportunity to acknowledge the past tradition, but at the same time to set the tone that next year may be different.
Emphasizing safety, respect and performance accountability for all employees sets a consistent message along with the critical expectations of serving customers with quality, delivery, solutions and value. Unlike a “turnaround” situation, the business you buy in search should be able to function on “auto-pilot”.
Be sensitive to employee’s feelings toward the seller. They may be either hostile or very loyal. Don’t assume that once you own the business that loyalties will shift easily. Be very cautious of comments about the previous owner by not overly praising nor criticizing by saying “we won’t be doing things that way anymore”. Respect is the best catchword here. Gather information on how the seller made decisions, communicated and interacted. Emphasize your own way of doing things without being disrespectful. Just move forward and let your actions speak for themselves.
Carefully observe and understand the organizational structure. Resist the temptation to make any significant personnel changes in the first 6 months. Jumping into the hiring process sends a conflicting signal about your taking time to “understand” the business. Trust your managers to make their own decisions; don’t get sucked into early personnel issues. If necessary, don’t replace people who do leave, and instead take on their jobs until you have a clearer look at their responsibilities. Your first hires will get a lot of scrutiny as everyone tries to decide what signals you are sending by your selection process. Take an even longer time to change personnel in the sales area, you will be better off learning how to “carry the bag” and visiting customers on your own after your first year and before anything significant changes. Avoid hiring friends or acquaintances, again being mindful of the message that it sends.
Focus on what is most important
Paying attention to cash flow and profitability will be paramount during the first 2-4 years while paying down your debt obligations to the seller and bank. Revenue growth should be a secondary goal as it may be accompanied by increased cash flow requirements, which you can’t afford. Having a cash cushion of two full quarters will help prepare for an eventual economic downturn that might not have been in the optimistic projections for the business. Consider paying your vendors early to take advantage of discounts, giving you the ability to go back to extended terms in a future cash crunch. Best to keep your excess funds for reinvestment in the business rather than for early payments to the seller, bank or investors. Take time to develop a deep understanding of where you make money in the business and more importantly, where you don’t.
The operations side of the business is where the business model strategy gets executed. Bringing “lean” principles to bear in these internal areas is much faster to implement than external, customer-based initiatives. IT systems should be high on your list of targeted areas. Often, SME’s ignore this area which can make a huge impact on your competitiveness. Finding margin improvements through procurement cost reductions and price increase opportunities can have more of an immediate impact on profits than market and product innovation which have a much longer horizon.
When there are two searchers, it is very important to clarify roles and responsibilities. Everyone will soon understand that you are “co-owners”. Co-Presidents is too confusing for employees and outsiders. Nick Lardo took on the CFO role and his search partner, Nick Kulkarni, the CEO role to avoid confusion. This is the time to leave your ego and resume-building at the door to send a clear message to the organization about your roles. Early on, the default for decision making should be the old owner!
Developing a good familiarity with the financial reporting systems is critical over the first year. Drilling down to customer and product profitability will support data driven decisions about the future. You don’t need a fully implemented ABC costing system, 75% accuracy should be enough. Develop a daily and weekly dashboard of key metrics that both measure results and can be used to predict future trends. You don’t have to be a CPA, but you do have to know, in depth, how the accounting systems affect your business. Be prepared to run a payroll or two which will be very much on the minds of the employees who care a lot about their weekly paycheck. You may have learned the general overview of accounting principles in school, now is the time to dig deep and “own” the numbers.
Most searchers report that their early few months was dominated by listening to employees, learning how things work and a myriad of details that have to be wrapped up after the transaction, ranging from payroll, insurance, bank reporting, contracts and other “boring” things.
Don’t forget to take care of yourself, both your mental and physical health. Pacing yourself and trying to maintain balance in your personal life can be attained if you set your priorities and develop a longer term view. Sleep, exercise and eating properly will impact your health and your well-being. Your body will tell you if you are ignoring it. Two searchers I know became quite ill within 3 months of closing; a wake-up call to slow down after the rigors of search. Being in a single location will bring stability to your personal life and allow you to devote time to your significant other who has supported you through the search phase.
Running the business you acquire in a search is a long-term endeavor. It is not a sprint, but more like a marathon. Being thoughtful and proactive about your early days as you learn the business will go a long way to developing the knowledge you will need about your employees and customers. This all about trust. You have to earn it; and it takes lots of events for others to begin to trust you. Also, you have to trust them; the more and faster you do that the quicker they will trust you.
As you discovered in the search process, your skill set for running the business will develop with practice. The learning curve for general management can be quite long. Avoid the rush to “get everything done at once” – you will be doing this for longer than you spent searching for the business. The business you buy will not be the same in 10 years, but does not have to change overnight. Unlike a startup, your success will be based far more on execution and adapting to opportunities than on any one innovative “idea”.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I regularly update individual blog posts, add to the Reference section and Search tips, so visit the www.jimsteinsharpe.com website regularly.