Run Your Business Today Like It's Changing Hands Tomorrow
Every business changes hands eventually, and most can't carry their value to the next owner. What makes a business transferable is the same work that makes it worth owning today: a defined culture and servant-based leadership that doesn't depend on you. There's no reason to run your business any differently than you would the day you get serious about handing it off.
Once upon a time, there was a serial entrepreneur who owned three companies. The first was the one he started with, and still the largest. The second he had bought a few years earlier. The third was barely out of the startup phase.
His largest company was getting beat on price from China, so rather than fight it, he bought a supplier there to vertically integrate. It wasn't going well, and he decided to move his family overseas to fix it himself. It could be a year. It could be two. Before he left, he sat down with three of his key employees to explain the situation.
He appointed his second in command as interim CEO with assurances that if necessary he would be available, but only in a crisis.
To the manager of a newly acquired subsidiary, he gave a little encouragement, but not much direction beyond that.
Finally, he met briefly with the manager of their original location. This was a sentimental spot for him. He still kept an office in the back to get away from the noise and distraction of headquarters a couple of times per week. He wanted the store manager to know he would be gone for a while and that if necessary he could retask that office since he didn’t know when he would be back.
He was gone for about a year and a half. From overseas he could see the orders they were sending headquarters and not much else. He figured headquarters was replacing some of their more expensive material orders from third parties with these new, lower cost materials that he was providing. At least HQ was not going backwards. But that’s about all the thought he was able to give it.
After 18 months he returned, having successfully turned around the Chinese supplier. When he got back, he found the orders he had been seeing were not replacing domestic suppliers. Orders from overseas and domestic suppliers had both grown and production had more than doubled. So had profit. He told the leader there was no reason for him to step back in as CEO. “You've run it for a year and a half without me, and you've done a better job than I did. You're the CEO now, and you should have some equity in the business.”
The newly acquired subsidiary had also more than doubled. He sent that leader out to make more acquisitions and do with other companies what he'd done with this one, with a piece of every acquisition he made.
But the original store location hadn’t changed at all. In fact, his old office was still sitting there untouched and unused. He fired the store manager and told his CEO to figure out what to do with the location.
I'll come back to where that story comes from.
The Succession Trap
Fewer than 30% of businesses handed from a first generation to a second survive. That's survive, and only a fraction of those go on to outperform what mom and dad built. By the third generation, the number is 12%. We work with third-generation companies, and I keep trying to explain to their owners how rare they are.
Selling doesn't fare much better. Only three out of 10 businesses that go to market find a buyer. Put it together and roughly 70% of businesses are incapable of transferring value from one owner to the next.
Succession can take a lot of forms.
A founding generation hands the business to the next one.
A group of key employees buy it
You set up an ESOP.
A strategic buyer outside your market buys it to gain a foothold
Private equity makes you an offer.
There are a hundred ways to go through it, and every one of us will. Something is going to take you out of your business, whether that's a sale, a transfer to your employees, or your death. The only question is whether you're prepared for it or you let it happen.
“We are going to go through succession at some point. The only difference is some of us are going to be very well prepared for it, and some of us are just going to
Success and Succession Ask Different Questions
Success is about outcomes. It asks whether the business pays you, and it can pay you in a lot of ways. It can obviously pay you salary and dividends. But it can also pay you reputationally. It gives you a reputation as a successful business owner, which is a big one we don't talk about much. And if your heart is in the right place, success also allows you to give generously.
Succession asks a different question: will it live beyond me?
Whether you are looking for a third party sale or a handoff to a family member, almost everyone misunderstands what determines the failing 70% from the winning 30%.
Everyone thinks that profits, sales and systems are the secret ingredient. And they are to some extent. You need them to be successful. Systems help you train people and deliver consistently. Sales and marketing ensures you have predictable revenues and know where your business is coming from. Profits feed the cycle and provide incentive for the owners to make hard decisions. But as we’ve said success is not succession. For you to transfer that success to someone else you need two more ingredients. The first is Culture.
Culture Needs Four Things
"We're like family here." I hear it all the time. Think about your next Thanksgiving lunch. Family holds a lot of promise for dysfunction. Culture has to be about something more, and in our playbook it takes four things.
The first is values. Values are three or four words with definitions that describe the behavior you'll tolerate and the behavior you won't. They set the expectation for how you'll be treated and how you'll treat others, and they have to be non-negotiable. Our values at Axiom are care, truth, diligence, and learning. I've been called out by members of my own team for a lack of care and for a lack of diligence, and I'm grateful for it. If the values mean enough for someone to confront their boss, they mean something.
The definitions matter as much as the words. Put integrity, honesty, and excellence on the conference room wall without definitions, and everyone is free to interpret them however they want. That gets expensive the day you need a values conversation, and values are where the hard conversations live. Performance conversations are easy. You haven't hit your quota in three months. Our policy is to call the customer back within 24 hours, it's been three days, and this keeps happening. The harder conversation is with the salesperson who doubled or tripled his quota and leaves a wake of bodies down the hallway every time he comes through the office. Tell him he isn't showing care, and without a definition he'll tell you he's caring for everyone, because if they don't do their job, you all go down. At Axiom, care means we love those we serve. There's no room to misinterpret that.
Values also work in the other direction. They're how you appreciate people and get more of the behavior you want. When you see someone live out a value, call it out and tell them the story they lived out.
The second piece of culture is vision, which is where you're going. If I invite you on a road trip with snacks, a great playlist, and a cooler full of drinks, you might come along. Five or six hours in, besides a rest stop, you want to know one thing: where are we going? But if I tell you I've got two tickets to watch your team play in the Super Bowl in Atlanta, you jump in the truck and don't care about the snacks. When we get a flat tire, you're out there helping me change it. When traffic backs up outside Atlanta, you've already found an alternate route on your phone. If you don't give your people a destination, all you have to offer them is a paycheck for their time, and you don't have a right to expect their engagement.
The third piece of culture is your “why?”, the reason that your vision is worthy of everyone's best effort. About 10 or 15 years ago, I sat down with a field technician who'd been with a company about five years, their top tech and an up-and-comer. I asked him about the vision for the company. He thought for a second and said, "35 feet."
Every morning, the technicians drove around to the back of the building where the materials were staged. Right in front of them, in the back lot, sat the owner's center console fishing boat. It was 19 feet when this tech started. Two years ago it was 23 feet. Now it was 28 feet. Every guy rounding that corner knew he was working so the 28-foot boat could become a 35-foot boat.
That is not a vision worthy of anyone's best effort. You owe your team transparency about why the thing you're pursuing is worth theirs. When you can say it, you attract people who want to do things for the same reasons you do, and you never have to question the loyalty of someone whose motivations match yours.
The fourth cultural element is mission, which tells you whether you won the day. The word has military roots. The mission isn't the war or the battle. It's the slice of work in front of you today. Does your team know what winning looks like every day, especially on the days the numbers go south? One of my favorite clients, Tri County Air Conditioning, has a mission to comfort all in such a way that it honors Jesus Christ and compels them to tell others about their experience. A technician can put four proposals in front of four people who need air conditioning help, sell none of them, and still win the mission. The likelihood that he wins the mission and sells nothing is extraordinarily low, and their success proves it.
Leadership That Replicates Itself
In addition to culture, succession requires leadership that has to be servant-based. It isn't a parking spot at the front of the building or a position near the top of the org chart. Look at the line above your name on the org chart. That's the person responsible for your success. Look at the people below you. You're responsible for theirs, including whatever resources and training they need. What does that look like on a day-to-day basis?
The first thing a servant leader does is encourage. Encouragement is the superpower of a leader. A client had hired a sales manager named Tom who had a great first year full of early wins. Years two and three were brutal. There were toxic salespeople, the team was reverting to old habits, and every day was a slog. At the end of one of those days, Tom was four steps into the parking lot when he heard the owner, Jack, call his name. Jack walked up to him and said, "Tom, I know how difficult the last couple years have been, but I see what you're doing. I know you're doing the right thing, and I just want to tell you I appreciate it."
Years later, in a leadership team meeting, Tom said that was the day he decided that if they didn't want him there, they'd have to drag him out kicking and screaming, because he was never leaving.
You speak with a megaphone as a leader. There is no low volume. If you walk down the hallway sighing and wondering out loud what you're going to do, people assume the company is going under and start polishing their resumes. When you encourage people, they hear it louder than almost anything else in their lives. They go home and tell their spouses, their kids, their neighbors, and the friends who wish they worked for a better company.
The second role of a leader is exhortation. When someone misses the mark, you owe them an uncomfortable conversation. “You didn't get this done. I know we talked about it and I'm pretty sure you understood what needed to happen, but it didn't. You need to do better, and I know you can. I believe in you, and I'll help however you need, but this has to change.” Most high performers can point back to a couple of conversations like that and credit them for what they've done since. Skip them, and you take away one of the most powerful things you can do to build someone up for their future.
The third role of a leader is empowerment. Once someone has earned the encouragement and responded to the exhortation, it's time to let go of some things and create opportunity for them. This is the part that terrifies us, because it's a big account or a huge project, and if they get it wrong it costs you. They've proven themselves over and over, and when they haven't, they've responded well. It's time to give them the opportunity.
The whole point of servant-based leadership is replication. People on the receiving end start to emulate it. When they move into roles where they depend on others to get the work done, they already know this is the best way to do it.
What a Buyer Wants to Know
Anyone buying your business asks the same first question: what happens when you leave? The best evidence they have is what happens while you're here. If every decision runs through you, nobody is empowered, and you're the only one handing out encouragement and exhortation, they assume all of it leaves with you.
If they can see a team, at the top, in the middle, and all the way to the front line, it tells a different story. A frontline employee encourages a customer who has taken good care of their air conditioner or their car. Someone finds a tactful way to exhort a colleague who isn't carrying their weight. People empower each other without a title. That's the makings of a phenomenal company.
Your Responsibility to Be Ready
There should be no difference between the way you run your business today and the day you get serious about handing it off. Anything else leaves opportunity on the table.
The story I started with is the parable of the talents, which Jesus told in Matthew and in a different version in Luke. I've heard it preached and discussed at CEO roundtables as a story about multiplication and stewardship. But read what comes right before it in Matthew. It's the parable of the ten virgins, the bridesmaids waiting for the groom to return so the banquet can start. Five of them have oil for their lamps. Five figure they won't need it. The night gets later, the ones without oil ask the others to share, and they're told to go buy their own. While they're gone, the groom arrives, the banquet starts, and when they knock on the door they are unceremoniously told to get lost.
The next parable is the one about the talents. The master leaves, and the servant entrusted with the most goes at once and starts trading. I think the parable of the talents is about our responsibility to be ready. God has arranged the circumstances of your life so that you lead your business. Do that well, and you'll be in the best possible place for succession, and available for whatever He calls you to next.
Key Takeaways
Fewer than 30% of businesses survive a handoff to the second generation, and only three in 10 businesses that go to market find a buyer.
Success asks whether your business pays you. Succession asks whether it lives beyond you.
Succession is decided in culture and leadership.
Values need definitions, a vision needs a destination, the why needs to be worth your team's best effort, and the mission should tell them whether they won the day.
Servant-based leaders encourage, exhort, and empower, and the people on the receiving end learn to lead the same way.
A buyer judges what happens when you leave by what happens while you're here.
Frequently Asked Questions
How do I know if the next generation is ready to take over the business?
Put them in the operating rhythm and watch. If you've sat in a weekly accountability meeting with them 52 times a year for three or four years, you already know whether they deliver, whether they pick the right 90-day priorities, and whether they hold people accountable and lead by encouraging, exhorting, and empowering. At that point the only thing left is to give them more responsibility.
Should I share the company's financial statements with my leadership team?
Yes, but teach them to read the statements first. Put a P&L and balance sheet in front of people who don't know how to read them and you can do real damage. They see a $3 million cash balance and forget that payroll runs $250,000 a week. With clients who open their books, we'll spend a year teaching people to read financial statements.
How many priorities should my leadership team work on at once?
Start with one focus for the next two to three years, and one team priority each quarter. Walk before you run. After a year or so, depending on how things are going, each leader can own a 90-day priority with their own weekly dominoes, and a team of five can move the business forward five times as fast.
What if I never plan to sell my business?
Run it the same way. We use this operating model with companies that have no plans to sell or transfer and want to run the most profitable, best possible business they can. Something will take every owner out of the business eventually, and this work makes the business stronger either way.
References and Downloadable Resources
Listen to the full conversation: Episode 200 on the Grow With Purpose Podcast