|It was August 1999, nearly 25 years after Ted Gunkel founded Madison Valuation Associates, and he had an important choice to make. He could retire and sell the office furniture and computers, or he could pass the torch of ownership to the next generation of key employees of his valuation firm. Ted wanted the firm to continue both for his employees’ future and for the unique niche it served in the business and legal community and he succeeded at doing that. In 2005 we changed our name to Capital Valuation Group, and we’re still here after 45+ years specializing in business valuation and serving as business damages experts. This is the scenario that every service-based business owner faces at some point. Service-based businesses like ours don’t really own tangible “assets” such as equipment or inventory. We depend on our staff’s training, expertise, and ability to arrive at meaningful, supportable conclusions. While a manufacturing company plans for future capital expenditures for buildings and equipment, service companies plan for future hiring, motivating, training, and retaining the best talent.
As we enter our third generation of ownership transition, we thought it might be helpful to make ourselves this month’s case study and share principles we’ve applied that have served us well in transitioning ownership over the years.
|1. Flattening the organization. In the ’70s, service/consulting firms were most often structured hierarchically, with a key individual and a support team. Management philosophies evolved, and in 1999 our firm set out to support all team members in obtaining the training and highest available accreditation for business appraisers. This prepared each employee to do all aspects of business valuation and damage calculation assignments. Today we maintain this approach of being an interdisciplinary team of credentialed business appraisers and damages experts.
The takeaway: create an organizational structure that fits your company vision and values, and adapt over time as needed. Don’t allow the business to be dependent on just one key person.
2. Having an Entrepreneurial Mindset. Knowing that we want each team member to have the opportunities noted above, we set out to hire entrepreneurs interested in partnership in a boutique firm, versus employees looking for their next job. We hire people who are self-motivated, who want to have a say in the firm’s future, enjoy a collaborative environment that holds each other accountable and are driven to keep doing things better. This mindset isn’t something you can teach--we describe it as “having a fire in your belly.”
The takeaway: when hiring, be transparent about the type of person you’re looking for to fit with your culture and long-term goals for the business. When you find the right fit it’s important to deliver on what you’ve promised. For example, be sure to have a defined timeline and plan for your partner-tracked hires and follow it.
3. Shared Accountability. Our partners share risk and reward evenly to motivate a team that works together to take both a short- and long-term view of success for the business. Based on our shareholder agreement, return on investment is earned and distributed quarterly and it is distributed evenly amongst the partners. Everyone is accountable to be contributing over time, even though productivity may vary over any given period. We manage this through a weekly dashboard review and hold each other accountable. These frequent conversations are critical because they allow for open lines of communication.
The takeaway: Each of your team members plays a role in the success of the business, regardless of structure. When people understand how they can contribute to the collective success of the team it can lead to increased motivation and retention. Pay close attention to what behaviors you motivate through all forms of compensation. You get what you motivate.
4. Measure Value Annually. While these other points are practices we’ve refined in CapVal’s ownership transition realm, we also follow our own advice of completing an annual business valuation. We want to know if the value is increasing, as this directly impacts each of our investments in the firm, regardless of how close any one partner may be to retirement. Ultimately, we are here to increase the value of our firm for the long-term success of both the firm and its team members. This valuation also is then used to update the valuation provisions of our buy-sell agreement.
The takeaway: An annual business valuation and review of valuation provisions in the buy-sell agreement can help business owner(s) understand and work together to increase the value of their business. There are a number of ways to approach succession planning. These are a few keys to our success over multiple ownership transitions in a boutique service firm. As we’ve worked with business owners in businesses of all sizes we’ve seen many other approaches.
Give us a call if you’d like to talk about your specific situation.
Cathy is the President of Capital Valuation Group, Inc., headquartered in Madison, WI. Capital Valuation Group has been helping business owners across the country understand, increase and unlock the value of their businesses for over 40 years through keynote speaking, valuation analysis, determining damages and providing expert witness testimony. Cathy welcomes conference and event speaking inquiries and can be reached at firstname.lastname@example.org.