Summary
Business transition is a process
The Paradox of Fairness
Problematic Issues of Power
Preparing for Mid-Market Business Transitions
With nearly 180,000 U.S. mid-market businesses, accounting for $9.3T in revenue, mid-market businesses fuel the US economy. According to CION Investments, “if the U.S. middle market was its own country, it would be the 3rd largest economy in the world.”
Responsible leadership principles drive successful owners to intentionally consider how their business transition impacts family, key leadership, community, and customers. Here are three truths to consider.
Transition is a Process
All business transitions involve a confluence of activities, tasks, collaboration, and human capital management. As the owner of a business experiencing high levels of change, it quickly becomes evident that the transition doesn’t occur simply because you have decided to move forward with it. Instead, that decision sparks a process that typically takes 3+ years to integrate throughout the business. You may experience frustration, believing that a decision made equals a decision acted on. However, years of change management research has shown that people and organizations don’t shift immediately. Here are a few tips to help you gain insight into the change process:
Change that is thrust upon another person is almost always rejected, at first. Change increases ambiguity and uncertainty, typically requires people to adapt the way they work, and often how they perceive their work, and sparks concerns over job security and personal value in the business. Expect that people will, during initial conversations, either demonstrate unity around the vision artificially or will openly resist the vision. This is a normal process for change initiatives and takes more time to work through than owners expect. You will either walk away believing everyone is on board (likely in a superficial or artificial way) or you will feel that your team is resistant and narrow in their thinking! But don’t lose heart. Instead, develop a plan for repeated messaging about the need for a transition and the outcomes you seek to achieve. As you take steps toward the transition these messages will serve you well as you remind people of what is happening and why change is required.
Alignment is a cross-functional process, involving significant people management and dynamic leadership. Aligning staff, systems, and processes to the changes needed, can quickly reveal complexity in the organization and for the people leading it. For scale, sale, or succession to occur, a comprehensive approach to development is necessary. “Band-aids” and” firefighting” techniques won’t work as they did in the past because the systemic issues have grown and change will expose the larger, more complex issues. Identifying root issues, assessing their connectivity across the organization, and engaging in problem-framing to confront the root cause will forge a pathway toward long-term change success. This time of alignment brings clarity to the high functioning areas of your business as well as the roadblocks and undeveloped sections of the organization. As this happens you, your staff, and leadership will likely experience a desire to self-protect, hoard knowledge, and create diversions to keep “prying eyes” away. This intersection of business and psychology can create a storming culture that threatens the success of your change initiatives. Pushing through this stage, like a bull in a China shop, is one of the greatest temptations owners will face throughout the change cycle. However, the act of alignment is crucial to successful execution. When an organization and its people are aligned to the new vision, execution becomes smoother and more motivating. When alignment isn’t achieved prior to execution, stress levels increase, people work long hours, frustration occurs, and turnover becomes a threat to success. Taking time to align your business and your staff, positioning them for success, will reap great reward in the transition.
Execution is the final phase for any transition. It isn’t enough to have a great idea and to onboard people to it. As the owner and leader of this transition, you must stay engaged in the process of execution. You will be tempted to move on to the next idea or need in your business, leaving the execution to your staff, but this would be a mistake. When you begin generating new ideas, vision, and ways of doing business you are acting as if the transition has already occurred (because in your mind it has). However, as you begin to express the new vision to staff, they are still attempting to complete the execution of the previous vision. This sends mixed messages, creating competing priorities, and decreases the effectiveness of implementation. At this stage, patience is the name of the game, waiting for the team to succeed and celebrate their success, before introducing the next vision.
The Paradox of Fairness
According to Harvard Business Professors, Paul Lawrence and Nitin Nohria, there are four core human drives that profoundly influence our decisions and actions.
A drive to Acquire
A drive to Bond
A drive to Learn
A drive to Defend
These core drivers are sensitive to the issue of fairness. The paradox of fairness is that fairness does not equate to equality, in which everyone gets the same thing. Instead, fairness is about everyone getting what they need. When business owners prepare for transition, this need for “fairness” will likely arise among key leadership and future owners.
The idea of fairness taps into a person’s identity and sense of self-worth, causing an array of behaviors that can hinder business transition. Understanding that this need is emotionally driven, complex, will challenge strongly held workplace culture, and deeply held patterns of behaviors in family-owned businesses, can reduce frustration. The need for “fairness” can also trigger an avoidance coping tactic among the leadership team/family creating a sense of stability, but eventually the tactic breaks down like a falling house of cards. Seeking to establish open communication, creating clarity, and carefully orchestrating how and when the cards fall is a courageous commitment that owners must make if they hope to move the entire organization through the transition.
Problematic Issues of Power
As you move through the process of transition problematic issues of Power, Authority, Control, and Influence (PACI) can become more complicated as money, relationships, and personal psychology overlap during change. What and how behaviors are expressed during shifts in PACI among shareholders and employees in closely held businesses serve as leading indicators for the likelihood of success at points of significant transition.
When unhealthy, concentrations of power exist in the business, they become magnified through the transition process. Identifying and correcting PACI issues requires careful observation of symptoms and identifying the root cause(s) to frame the problem correctly. Unfortunately, the most common approach is to address the symptoms – lack of role clarity, write a job description; lack of trust, hold a communication training -- instead of the real problem. As you transition away from day-to-day operations, new power structures are built. Understanding this reality and carefully guiding PACI development in your organization can keep you and the transition on track.
Businesses exhibiting the following symptoms are at substantially greater risk of a failed transition:
A lack of trust or transparency (artificial harmony may dominate)
Ineffective or inefficient decision-making
Lack of role clarity
Absence of a formal budget or strategy
Excuses substituting for results
Lack of accountability
Non-productive conflict
Strained relationships
Absence of a documented succession plan for senior leaders and owners
Significantly slowed, plateaued, or declining annual revenue growth.
When PACI is properly diffused through a business, shareholders have controls that give them visibility and control over their investment while freeing employees to drive more profit to the bottom line. The following five steps offer the basic methodology for disseminating power:
Discover: What is the current reality for PACI in the system (shareholders, managers, influencers)? How might this reality impact the transition?
Explore transition goals: What is the vision for the transition? What are the expectations for owners and managers?
Design the approach: Align the organizational structure, roles, responsibilities, governance, and management decision-making to support the organizational strategy and a successful transition. This must include establishing new channels of power through control, authority, and influence that are explicitly managed.
Implement: Incorporate these dynamics into the transition strategy and action-planning so that all parties have visibility, shared understanding, and can effectively coordinate.
Iterate: No transition goes exactly as planned. Having clear points of evaluation and refinement is essential. This also helps to build a culture of adaptability and shared learning.
Conclusion
So, where do you begin to address these challenges for a successful transition?
The good news is that you already have. By taking the time to read this article, you have taken your first step towards joining an elite group of owners who had successful transitions.
Orange Kiwi understands that the process of transition is neither quick nor straightforward and that business owners may need a little help along the way. Contact Orange Kiwi, LLC for your first consultation.