F & A Advisor: Are you irreplaceable?

Aug 26, 2011

By W. Hobson Hogan Principal, Investment Banking Our ego makes us think that we are irreplaceable; there is no way that our organizations could soldier on without us. You imagine your office falling apart the second you are gone— people wandering aimlessly throughout the halls in need of your guidance. This is rarely the case. The vast majority of firms can handle the loss of one person, regardless of their position. Most firms have competent people who are ready to step up and take on the responsibility of a higher position. Let’s suppose for argument’s sake that you, as a leader and expert in your field, are irreplaceable. What does that mean relative to the value of your firm and your effectiveness as a manager? From my perspective, as an advisor who helps firms navigate ownership transitions, irreplaceable leaders make for difficult transitions, whether that is an internal transfer or an external sale. As I consistently preach, the value of a firm is measured by the cash that it will generate in the future, not the cash it generated in the past. If your firm is built on irreplaceable leaders, rainmakers, or industry experts, then your firm will struggle to find interested buyers both within and outside its walls. The question posed by an external buyer will be, “Who is going to run this place?,” and the question from within will be, “Who is going to run this place?” I define irreplaceable leaders as those who either intentionally or unintentionally have created a culture in their firm where no person or group of people can take on the responsibility of leadership. In some organizations, the lack of future leaders is due to poor recruiting or retention of quality professionals. This may be due to a business model or culture that creates few opportunities for upcoming professionals, or it may be related to the personalities of the firm’s leadership. Below are three types of firms that I regularly see struggling with finding an exit plan for their owners.
  • The barbell— This firm has low-level resources and senior resources, but lacks people in between who can fill the roles of the senior partners as they depart.
  • The guru— This firm has a leader who builds a strong cult of personality around his name and reputation. Guru firms often train many top quality people, but struggle with holding onto future leaders due to personality conflicts.
  • The clique— Has strong individual teams or offices, but its silo nature makes it difficult to build a cohesive culture. The clique often cannot agree on a way forward and may break apart or just wind down.
If your firm is best described by one of the terms above, you could have issues in an internal ownership transition and certainly in an external sale. I am not knocking these constructs as invalid business models, because in the near term, these may be the most profitable way of competing in the marketplace. My word of caution is related to how you, as an owner, will extract the most value from your firm. Some firms choose to invest in building the next generation of leaders, possibly at the expense of current earnings, in order to assure themselves of a better valuation when they sell their shares. Like any investment, there should be a reasonable expectation of a positive return on this investment. It could be possible that your firm may not have value in the marketplace above its book value. This should not necessarily be viewed as a failure, provided you are receiving higher income today to offset a lower valuation at your exit. The reality of our marketplace is that not every firm is saleable at a premium. A reasonable expectation for some firms will be to simply sell for book value to a firm that will take over its current projects and workforce. In many cases, that would be considered a win because winding down a firm costs money, and the value an owner would receive is somewhere between 50% to 80% of book value, depending on how efficiently the wind-down occurs. If you feel that you have created an environment where you are irreplaceable, then you should prepare yourself today for the possibility that your firm may not achieve the valuation in the marketplace that you are expecting. A good name and reputation is not enough if the people who built the reputation are exiting. The impact to owners may not be as large as you may imagine. The reality is that you may only need to work a few extra years to replicate the difference between a sale at a premium and a sale at book value. You should ask yourself these questions well in advance of your exit and plan accordingly. The market may surprise you; however, you should hope for the best and plan for the worst.

About Zweig Group

Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.