“Loyd! It’s good to hear from you. I look forward to seeing you next week. I just wanted to speak with you on the phone before our meeting so you can be prepared for our hot topic. We are looking at buying another store.”
“OK,” I responded through the phone as I racked my brain for a reasonable response. “So Junior has come up with another prospect” I asked rhetorically. “As I recall he made a pitch for growth at our last Family Business Council meeting and he did not seem satisfied when you ultimately shut down the discussion that had migrated into an argument.”
“Yes”, Bill quickly returned with enthusiasm. “Junior has been doing his research and he is totally obsessed with buying another deal and he has won me over. With our management structure he just doesn’t have enough to do, and I am thinking that buying a new deal will give him something to sink his teeth into. I need you to help us develop an acquisition plan.”
“Bill thanks for your confidence” I responded, “But keep in mind I am a succession planner, not an acquisition specialist; and the conflicting interests of these two professions are worth mentioning. Succession is about developing and focusing resources for the perpetuation of the current business through the next generation of owners and managers. Acquisition is about leveraging resources to develop a new business. This leveraging actually diverts resources to new operating priorities. Succession demands organic growth through more efficient and productive operations. Acquisitions achieves growth with the hope that that the same efficiency and productivity can be maintained. Each endeavor has its own set of challenges. “
“Good grief, Loyd! You are quite the buzz-kill. As a growth advocate, I thought you were going to be excited about us buying another deal.”
He had now put me on the spot, more commonly known as the defensive. I replied, “Don’t mean to rain on your parade, but you pay me to tell the truth and from my perspective as a business succession planner, there is too much buying going on and not enough thinking. It’s what I call the ‘ready, fire, aim’ syndrome.”
We continued to chat about the store he was hoping to buy and it sounded impressive but was 75 miles from the flagship campus. As the hyperboles about the store subsided, Bill acknowledged that one of the reasons he keeps me around is for my unique perspectives so he asked me to share with him my concerns about the acquisition.
“Well Bill, don’t get me wrong, I am an advocate of growth in any form when done strategically; however the expansion of your business creates a new set of succession challenges when frankly we don’t have our arms around all the old ones. These challenges come in a diversity of shapes and sizes, any one of which can threaten the flagship that has provided your extended family an extraordinary lifestyle for the last 50 years. To summarize, my concerns regarding an acquisition relate to capital, capacity and commitment.”
“You have always enjoyed generous capitalization that has carried you through difficult times. After the ’07 financial crisis you did not fire anyone. In fact, during that strife you got bigger because several lucrative franchises were dropped in your lap just because the manufacturer knew you had the capital and the property next door to meet their facility requirements. Capital is the guardian of succession. When you start buying deals you can go from overcapitalized to pressed-for-cash quicker than used cars can take on water. Don’t forget that your kids are going to need excess capital to learn from their mistakes. Your dad gave you that opportunity, you made some whoppers and the lesson you learned has been the foundation of your success: Capital is King! Sure the banks are begging you to borrow money but don’t forget, those cheap rates are because you don’t depend upon credit. Banks don’t make money from independent borrowers. If the capitalization pendulum swings toward dependence on credit, you can count on the bank not only raising their rates but also requiring personal guarantees and intense pressure on you to use their other products and services that you currently shop very successfully. If credit becomes a concern to you, credit continuity could become a crisis in our succession plan.”
“With regard to capacity, I would urge you to really think about who is going to fill the key management positions at the new store. Your stores are a great place to work. Your managers are all very experienced and capable. But most important they are comfortable, and I don’t think any of them really want to go on a dragon hunt 75 miles away. Be prepared for either of two unfortunate circumstances: the managers you send to the new store conclude that they don’t like it and want to come back; or the managers you send like it and the flagship’s performance drops due to their absence. The only way I know to avoid this management expansion dilemma is to recruit new managers for the new store and endure the culture shock or begin building management bench strength from within your organization for the expressed purpose of growth. Teach management recruits your processes, core values and non-negotiables over three to five years for the expressed purpose of promoting them into a new deal. Obviously, since Junior started this expansion campaign only last year, there has not been adequate time for you to build acquisition-minded bench strength.”
I paused a moment to allow Bill to consider what I had said and also hopefully to reflect on our joint effort over the past five years to get his son to really embrace the car business. Then I offered my concluding thoughts that focused on Junior. “With regard to commitment, please excuse my candor but I do not believe that ‘giving Junior something to do’ is a valid purpose for expansion and the dilution of your resources, specifically time, people and money. The fact is, Junior has plenty he could do but he has rejected both yours and my encouragement to assume a line management position, work through the seats and prepare himself to be a Dealer. With all due respect, you have also not felt inclined to press him into a management role and have fabricated a title of COO to allow him to represent you at the various 20 Groups and Make Meetings and essentially float around and dabble in projects. Admittedly he has done well in the development of the new facilities and the assessment and installation of a new computer system. However, as the pictorial dictionary representative for A.D.D., he is not ready to lead a store 75 miles away and I believe it is totally predictable that Junior will be energized and passionate about an acquisition until the grind begins and then he will be on to his next adventure.
Commitment means that you have a valid, sustainable purpose for putting the performance of the flagship at risk. Providing Junior an opportunity to lead would be a good purpose if he had demonstrated an ability to manage. Therefore, prudence would suggest that you find another reason to endure the multi-dimensional stress associated with expansion. Commitment means that there has been extensive research and highly refined pro forma’s regarding the deployment of resources to an acquisition. Commitment also means that not only Junior but those who will be carrying the leadership and management load agree on the timing, process and specific acquisition target. In the absence of this kind of commitment your growth may become a liability to your long-term succession goals.”
Having dumped my bucket, I paused as I could almost hear Bill’s brain clicking on the other end of the phone. “Wow Loyd! Have you been saving that speech for me?” he asked with a chuckle.
“No Bill,” I quickly responded with levity, “but you can tell I have had practice. Unfortunately in light of prosperity over the last three or four years, you are not the only one who thinks they are great operators who should seek acquisitions. I have seen this phenomenon before, in the early 2000s. And unfortunately, what happened in 2007 confirmed that some who thought they were great operators were only harvesting good times because when the market dropped they did too. So as I am thinking ‘here we grow again’, I have too much invested in your succession not to share with you some of my pent up frustrations regarding what I did not say or do back then.”
“Thanks Loyd for your candor. Do you think we are great operators?”
“Interesting question Bill”, I responded. “We can talk about that later but let’s close with this observation and question for you to think about. Operations and acquisitions are two different leadership and management skill sets, each with a unique set of challenges. You are an experienced operator and an inexperienced buyer of new deals. As your organization’s leader, what priority should acquisitions have in your plan to perpetuate your business through the next generation of owners and managers?”
“Good question, Loyd. I’ll think about it.”