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Case Study: A Founders Predicament

Abstract
This discussion is based on the following case study:

A few years after successfully launching a new business, an entrepreneur found himself spending
16-hour days running from one appointment to another, negotiating with customers, drumming
up new business, signing checks, and checking up as much as possible on his six employees.
The founder realized that his own strength was in selling, but general managerial responsibilities
were very time consuming and interfered with his sales efforts. He even slept in the office two
nights a week.
Despite his hard work, however he knew that employees weren‟t organized and that
many problems existed. He lacked the time to set personnel policies or to draw up job
descriptions for his six employees. One employee even took advantage of the laxity in
supervision to skip work sometimes. Invoices were sent to customers late, and delivery
schedules were sometimes missed. Fortunately, the business was profitable in spite of the
numerous problems.

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Table of Contents

Abstract .................................................................................................................................................. 2

CHAPTER ONE: The Founders Problem .................................................................................................... 4

1.1 Is this founder’s problem on of time management or general managerial ability? .......................... 4

1.2 Would it be feasible to engage a management consultant to help solve the firm’s problems? ....... 5

CHAPTER TWO: Management Assistance ................................................................................................. 6

2.1 If this founder asked you to recommend some type of outside management assistance would you
recommend a SCORE counselor, a student consulting team, a CPA firm, a management consultant, or
some other type of assistance? Why? ................................................................................................. 6

CHAPTER THREE: Steps For Improvement ................................................................................................ 7

3.1 If you were asked to improve this firm’s management system, what would be the first steps you
would take? ......................................................................................................................................... 7

3.2 What would by your initial goal? .................................................................................................. 10

Conclusion............................................................................................................................................. 10

References ............................................................................................................................................ 11

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CHAPTER ONE: The Founders Problem
1.1 Is this founder’s problem on of time management or general managerial ability?

The business venture depicted above has now matured into a thriving company with a place in
the market and loyal customers. Sales growth is not explosive but manageable. This is why the
business has been able to “Stay profitable in spite of the numerous problems”.

The problem facing the founder is a problem of general managerial ability rather than time
management. As the company grows other people enter sales, production or engineering and
they first support and the even supplant the founder‟s skills thus reducing the importance of the
skill factor. At the same time the founder must spend less time doing and more time managing.
He or she must increase the amount of work done through other people, which means,
delegating. Many businesses fail because of the inability of many founders to let go of doing and
to begin managing and delegating. A founder contemplating a growth strategy must understand
the change in personal activities such a decision entails and the importance of transition of
control of the business.

In the initial stages the main problems of the business are obtaining customers and delivering the
product or service contracted for. The organization is a simple one and the owner (Founder) does
everything and directly supervises subordinates. Systems and formal planning are minimal to
nonexistent. The owner is the business, performs all the important tasks and is the major supplier
of energy, direction and capital. In some cases, the owner cannot accept the demands the
business places on their time, finances and energy so they quit (Churchill, 1983).
In reaching the second stage, the business has demonstrated that it is a workable business entity.
It has enough customers and satisfies them sufficiently with its products or services to keep
them. The key problem shifts from mere existence to the relationship between revenues and
expenses. The organization is still simple. The company may have a limited number of
employees supervised by a sales manager or a general foreman. Neither of them makes major
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decisions independently but instead carries out the rather well defined orders of the owner.
Systems development is minimal. Formal planning is at best, cash forecasting. The major Goal is
still survival, and the owner is still synonymous with the business (Churchill, 1983).

In the survival stage, the enterprise may grow in size and profitability and move on to the next
stage. Or it may, as many companies do, remain at the survival stage for sometime, and
eventually go out of business when the owner gives up or retires.

1.2 Would it be feasible to engage a management consultant to help solve the firm’s
problems?

The success experienced by the founder up to this stage may make them to believe that if they‟ve
successfully led the development of the organization‟s first new offering, that‟s ample proof of
their management prowess. They think investors should have no cause for complaint and should
continue to back their leadership. “Since I‟ve gotten us to the stage where the product is ready,
that should tell them that I can lead this company” is a common refrain.

Their success makes it harder for founders to realize that when they celebrate the shipping of the
first products, they‟re marking the end of an era. At that point, leaders face a different set of
business challenges. The founder has to build a company capable of marketing and selling large
volumes of the product and of providing customers with after-sales service. The venture‟s
finances become more complex, and the CEO needs to depend on finance executives and
accountants. The organization has to become more structured, and the CEO has to create formal
processes, develop specialized roles, and, yes, institute a managerial hierarchy. The dramatic
broadening of the skills that the CEO needs at this stage stretches most founders‟ abilities
beyond their limits. A technology-oriented founder-CEO, for instance, may be the best person to
lead a start-up during its early days, but as the company grows, it will need someone with
different skills (Wesserman, 2008).

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CHAPTER TWO: Management Assistance
2.1 If this founder asked you to recommend some type of outside management assistance
would you recommend a SCORE counselor, a student consulting team, a CPA firm, a
management consultant, or some other type of assistance? Why?

To deal with the founder‟s problem this discussion recommends the assistance of a management
consultant as a lead advisor who is a specialist in business transition.

Managerial challenges change in nature as the enterprise advances through the successive stages.
In the early stages, the owner‟s ability to do the job gives life to the business. Small businesses
are built on the founders talents. In our case the business is built on the founder‟s talent in sales.
In the first stages of business development, the founders skill is thus of the highest importance.
The owners ability to delegate is however of least important at this stage, since there are few if
any employees to delegate to (Churchill, 1983).

First and foremost, the founder‟s goals and objectives should be the driving force behind the
business transition plan and as each business transition is unique, each plan should be as well.

Second, the plan should be a collaborative effort of all of all pertinent advisors - accountant,
attorney, financial advisor, banker, mergers and acquisition/intermediary advisor - as no one
person has all the required knowledge, experience and skill set. And between them, they share a
ton of business and personal history that should not be set aside.

Third, to pull everything together, the team of advisors should be led by someone experienced in
the business transition field; a quarterback to oversee and direct all of the players in
harmoniously performing their skills. A leader not constricted by an unrelenting left brain
analytical focus. Someone that is capable of balancing the emotional and the analytical aspect.

By bringing a lead advisor on board, you will now have only one point of contact to deal with.
We‟ve found that by doing that, a great amount of expense is saved in both time and money as it
saves an owner from having to run around separately to each professional to get their advice and
input. It also spares you from the potential problem of receiving contradictory advice, direction
and duplicated expenses when dealing with each advisor in isolation (ROCG, 2008).
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The role of the quarterback is to streamline your transition process and save you from both
wasted time and expense. The small dollars invested here is nothing in comparison to what a bad
or poorly executed plan can end up costing you in the long run. And the benefit received, if done
correctly, should provide you with a multiple return on this investment.

CHAPTER THREE: Steps for Improvement


3.1 If you were asked to improve this firm’s management system, what would be the first
steps you would take?

Step One: Your Business Transition Objectives

What do you want to get out of the transition of your business? This is the most important
question the founder needs to ask him/herself. Whatever the objectives are, they should drive all
the decisions made throughout the transition planning process. Some of the questions to address
are: What things do you want to do? What do you want to be? What do you want to have as you
move on to the post transaction?
The purpose of these questions is to get the business founder focused on „end in mind‟ planning.
Having this direction, allows one to get their business to become a vehicle to take them where
they want to go. They are no longer working for the business. The business is working for them.
They are now in control of and driving the business verses the business and its many demands
controlling them.

Step Two: The Personal Review

Before one embarks on the transition journey, one of the first things they need to do is really
make sure they are ready to let go of the business. On the surface they might think they are
ready, but quite a few deals have been aborted by the seller in mid-stream, so it is important to
challenge your supposition. “The number one deal killer we see among family owned or closely
held businesses is having a seller who is not psychologically prepared to sell the company. Often
times in these situations the company is more than just a business to the owner; it‟s like a child
and they just don‟t want to give it up. But they sometimes don‟t realize this until they‟re already
well into the sale process” (Alternative, 2007).

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Step Three: The Business Review

The starting point in the business review should begin where one leaves off in determining their
lifestyle and legacy needs in the personal review process. During that planning stage, a
calculation should have been made to determine what total assets one will need at the time of
exit to fund their lifestyle objectives. In particular, one would have identified what value they
need to extract from their business when they exit. By comparing the value they need upon exit
with the current value, they would have identified any „wealth gap.‟ This gives them a starting
point as to some of the work that is in front of them.

At the end of this exercise, one may be fortunate enough to find themselves in the enviable
position of having their business‟ value be enough to meet your post transaction requirements.
That also is important to know, as it also gives them a starting point, albeit different, on what
work they need to concentrate on. In this particular case, they wouldn‟t need to look into
business development initiatives. Rather, they could concentrate on processes and systems and
other management transition initiatives. But, no matter where one finds themselves in the
business life-cycle or value spectrum, with a thorough business review, one will learn what
courses of action are necessary and what direction one should allocate their resources, to
minimize the associated costs and maximize the business‟ ultimate value.

As one looks to their company‟s future exit value, one should look at it from the buyer‟s
perspective. One need to identify what value potential buyers would look to get from their
business. If one is looking to an outside buyer, the review comes down to identifying what needs
to be changed to make their business more attractive and financially valuable to them. The
ultimate goal is to do what is necessary to make the business more saleable.

As one lays out their business plans and strategize how to achieve them, it is important that they
also identify potential obstacles that may slow down or derail their plans. As to a business having
too much dependency on the owner, it is one of many potential barriers that need to be addressed
in the planning review and later eliminated in the management implementation stage of the
business transition process. In particular, specific plans need to be made in conjunction with a
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definitive time table to ease the owner out of the day-to-day operations by transferring them to
someone else in the organization. Any dependency, be it the owner, one person, customer, or
supplier creates obstacles in maximizing value as each helps drive a business‟ value down.

By identifying these real or imagined obstacles early in the process, it allows one the chance to
either dispel them so they do not remain a hindrance or deterrent to action or to make appropriate
plans to remove, minimize or avoid them.

Step Four: Considering the Best Way to Exit

In this step, one should be reviewing the various options that are available to them to determine
what best meets their objectives in transitioning their business. Keep in mind that the answer to
this question can change from time to time and will depend not only on the particular business
and industry, but on what is happening with the economy and the industry in particular during
the actual time of exit. Depending on whom one chooses to transfer the business to, i.e.,
employees, charitable trusts, family, co-owners, or outside third parties, different methods of
transfer are available to choose from.

If one is looking to sell to third parties, planning should include the review of what type of buyer
would be most interested in the business:

• a strategic buyer that is interested in synergies

• a financial buyer that is looking for a return on investment, or

• an individual buyer that is more than likely just looking for a job

After the research of buyer options is complete and summarized along with the particular transfer
methods available, one can then weigh each one and choose what best meets the overall
objectives (ROCG, 2008).

Step Five: Finalizing Your Plan

This is where all of the planning and strategizing that took place in steps one through four gets
documented in writing. More importantly, this is the document that details what needs to happen
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to optimize the business‟ value and meet the other objectives. It is the document that will help
drive the execution of the plan. It should detail the moving on steps, complete with who is to do
what and when. It should set up accountability standards and spell out who will be in charge to
quarterback the process.

3.2 What would by your initial goal?

The initial goal would be to delegate the managerial duties to more specialized and skilled
personnel so that the founder could have more time to devote to his areas of strength and in
maintaining the entrepreneurial spirit rather than being absorbed in the day to day managerial
operations.

By following the described process, the exit strategy plan will be based on:
• The transition objectives
• The personal financial plan information
• Input from appropriate stakeholders
• An evaluative look at where the business is today
• A calculation of value of the business (if not a formal valuation)
• Knowledge of the benefits and consequences of each option, and
• Input from trusted advisors
Conclusion
A company‟s development stage determines the managerial factors that must be dealt with. Its
plans help determine which factors will eventually have to be faced. Knowing its development
stage and future plans enables managers, consultants and investors to make more informed
choices and to prepare themselves and their companies for latter challenges. While each
enterprise is unique in many ways, all face similar problems and all are subject to great changes.

From day-to-day operational demands, to avoiding emotional issues, to the need to stay in
control, there are many reasons owners have not addressed this critical business transition
planning need. But with a lifetime of work at stake, or at the very least a critical financial
component of retirement lifestyle funding, founders need to see their way past this easy
rationalization approach and do something proactive to protect themselves and their enterprise.

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References

Alternative P. (2007): “Sellers Beware: Five Problems That Can Sink Your Deal”. Mirus Capital
Advisor. March 2007.

Churchill N.C. and Lewis V.L. (1983): “The Five Stages of Small Business Growth”. Harvard
Business Review, Harvard

ROCG (2008): “Business Transition/Succession. The increased risk of Incurring Catastrophic


Losses and What You Can Do To Avoid Them”. ROCG October 2008

Wesserman N. (2008): “The Founders Dilemma”. Harvard Business Review, February 2008

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