It’s pretty well accepted that the skills and personality
required to be effective in leading a start-up operation are unlikely to be the
right tools the take the same company to maturity and/or eventual sale. In the PR industry the failure of individuals
to realise this maxim is inextricably linked to cases of Proprietorial Vanity Valuation
Syndrome (PVVS)
It’s an industry where a typical PR proprietor founds a firm
in their late twenties or early thirties. The spur may have been a failure to
acquire any ownership in their agency or the prospect of being an in-house wage
slave forever. Or, their talent as a freelancer requiring the support of other
freelance resource then, with time, the hiring of employed help. And so firms
are born.
Fast forward a decade or more and the same person, usually
approaching their half century, is worn out by the 24/7 effort that staying on
the pace requires. Sure, they’re making decent money by taking cash out of the
company but as the firm moves into its teenage years they decide they’ve had
enough
PVVS symptoms
They want move on to a better quality of lifestyle and that
increasingly occupies their thoughts. They
think that, particularly in the current frothy market, selling the company at a
premium would be the answer.
The problem is that, by this stage, PVVS may have set in, with
many proprietorial owners vastly overestimating both what their firm is worth
and their own value in any deal.
There are some classic early symptoms of PVVS. These include owners routinely
seeking consultations with M&A advisors.
Despite the advice of the specialists and the evidence of the marketplace,
they opt to do two things: they engage
an advisor with wholly unrealistic expectations of the potential acquisitors
and financial outcomes until the whole process ends in mutual disappointment
and acrimony; or they continue to talk intermittently to a succession M&A
advisors, holding on to their position in the firm until, in their minds,
someone will come along that realises what they imagine to be they and their
firm’s true value.
Acquisators don’t buy
proprietors
The reality is acquisators don’t buy proprietors. What they buy is the quality of the infrastructure
and services they have developed - the teams that they employ, the clients that
they retain and the work that is done.
They also buy strategic fit, future potential and ease of
integration with their existing operations. What they will pay for a firm and
how they will pay is mostly influenced by price earnings ratio achieved in
other recent and similar transactions, not what the owner thinks the firm is
worth.
If this value combination isn’t achieved to make the firm
attractive for acquisition - either per se or at anything like the owner’s
estimation of its worth - it’s usually the result of a series of mistakes
committed by the firm’s founder over the years and ultimately hardwired into
its PVVS-ridden DNA.
Five PVVS mistakes
First, founders fall prey to narcissism seeing only a threat
in talented employees, not the potential to create value in the firm, and money
for the owner. They fail to hire those
who they fear may be better than them.
So they recruit docile, uninspiring yes-people as employees
and even as non-exec advisors. This slows growth and restricts margin but also has
the effect of de-skilling the proprietor as the new enthusiasms, attitudes, ideas
and contacts that comes with vibrant talent and fresh thinking is
systematically choked off
Concentrated power
Second, they concentrate power in themselves, despite nods
to such window-dressing as company meetings and management structures. Nothing grows in the shade of large ego or
rampant insecurity, so an effective management team that can survive the
departure of the founder or build a better firm than the owner alone is not created.
This toxic combination is likely to deliver insufficient value whilst posing
unacceptable risk to the potential acquisitor.
Third, the lack of nurtured senior talent also means that
the vital checks and balances that exist in all the most successful firms are
missing, resulting in the proprietor believing that only they are right on every issue and
`why can’t others keep up`, `get it` `take responsibility` and so on and with
the effect of further increasing their dominance. The proprietorial leader attributes
this to the fact they `can’t I find people who are good enough` as though this
is solely an external cultural or generational problem over which they have no influence.
This, of course, completely misses the point that the
ability of staff to do these things rests on the searching, hiring, development,
management and cultural decisions made by the proprietor themselves. From the
outside that just looks like poor managerial judgement.
Chill wind of
alienation
Fourth, if left unchecked the effect of this approach is to
generate a chill wind of alienation over the years. Add a bit of bottled up
desperation, passive aggression, blamestorming on behalf of the proprietor and
you have a destructive culture of staff demotivation, dissatisfaction and
turnover that you can smell the moment you enter the premises.
If it looks closely at the history of such a firm, a
potential acquisitor is likely to see the waves building up to rollercoaster episodes
of mass resignation and then evidence of painful rebuilding before the cycle
repeats itself whilst the proprietor whilst providing a raft of reasons for
such events remains in denial of the true cause of the persistent malady.
The fifth mistake, and one of the contributing factors to the
roller coaster ride, is the proprietors’ belief that because they founded the
firm they can do with it what they like, using the firm as a vehicle to support
whatever extravagant whim or lifestyle fad takes their fancy. Ultimately, and as a majority shareholder in a private firm,
they can do what they want within the law, but such unguarded actions quickly build
resentment and destroy value.
Physical and
functional isolation of the proprietor
Tell-tale indicators of such behaviour include the physical
and functional isolation of the proprietor behind over-tidy, palatial personal
offices and saddling the firm with the overhead of an underused PA whose
function appears to be manage their diary, serve drinks, collect dry cleaning
or stand guard over the inner sanctum.
Meanwhile the rest of the under-supported team are housed like battery
chickens, sweating 12-hour plus days subject to the proprietor’s occasional seagull-like
visits.
Regarding themselves too as special case or aligning any
staff `treat` with subsidising their social life, personal tastes or cultural
aspirations is soon noticed by the staff who quickly take it as a cue to
develop their own selfish behaviour. This
does not develop the `can-do` attitude that acquisators look for in a rapidly
changing world.
Such proprietorial firms often end up being simply much smaller
more backward and less successful models of more developed and more
accomplished international generalist firms.
That also doesn’t make them particularly attractive for acquisition as few
firms acquire for bulk. If they do they aren’t going to pay very much for it as
the wastage can be high and better results can be achieved by organic growth
where cultural alignment can be assured.
The acquisator needs to be able to take their own firm
forward. That means that potential targets
also need to have something special in terms of adding new skills or
capabilities – strategic nouse, digital capability, international operations or
new sector expertise, for instance.
Avoiding developing PVVS
So what does this all mean if you are a potential or active founder
with an eye to a future exit that wants to avoid developing a nasty care of PVVS?
If you are to grow and guide a successful PR firm to exit do
it with a least one peer partner with complementary skills, so you can ensure
it’s not all about you.
Adding at least one ying to your yang will help you scale
faster and keep you on the straight and narrow. Create a sector specialism or
get on the latest wave of communications too or forever face the prospect of
being a small and increasingly less valuable generalist player.
As soon as you are able, develop a senior management team with
real responsibility who can run the company if you fall under a bus. Constantly push responsibility downwards and
make sure they have the potential to be better than you - that will challenge
you to improve constantly but also give you time to do it.
But ensure that they don’t walk away with your firm by creating
the stimulating and rewarding working environment and team spirit that makes
them laugh at the blandishments of headhunting calls.
Work in close proximity to the team and recognise their
contribution on a daily basis and by giving them meaningful equity
participation that can be realised at a foreseeable exit or allow them to
invest in the firm on attractive terms. You may even want to plan for an easier exit via
management buy-out (MBO).
Remember, always, that having smaller share of a bigger,
successful, clearly differentiated firm is likely to be more valuable than a
bigger share of a smaller less successful run-of-the-mill one.
Who knows too, you might just be able to realise the value of
the former whilst getting stuck with the latter...
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