Continue, Detach, Replicate, Sell Out, or Sell Up?

By James Cannon Johnston

The Background

This is a sanitized version of the advice I gave to a founder/CEO client who was unsure how to proceed with his business. The core question was, “What’s next?” He had built a profitable business that had potential to grow quite a bit more. Elements of its technology could be the basis of separate new businesses with other customer sets and even in other industries. We talked about it for months. I outlined for him the following five possible paths forward.

Where We Stand

The company is changing from a software company to an administrative processing service. Broadly speaking, this will mean lower risk, lower average wage and skill, higher turnover, more stable revenue and profit, with less chance of bonanza or crash, more operational controls, less intellectual stimulation (think “time to make the donuts”), less technology creation, more technology use.

            The growth of the service division has been as fast as most hot startup companies would hope for, over 100% in a year, with small risk and investment. Yet, this is a business that venture capitalists would not fund, because the ultimate market size is smallish and there is some chance the market will go away. On the other hand, this is a great business to own. It can provide you a good income, low stress, and something fulfilling to do. A year ago, we agreed that a priority for the coming 12 months was to grow the company’s annual revenue by 28% and cut your time to 20 hours a week. In fact, we have grown revenue 48% and for next year we’re about to put 33% growth into our plan. My impression is that you have cut your time some, but not down to 20 hours. Going forward the next few years, here are five possible scenarios:

Five Paths Forward

  1. Continue. If you take this path, the business does well, you work in it full time, and you keep involved in the day-to-day operations. In three years, the Company grows to double or triple its current size, with no major change in the concept. Your two top direct reports stay in their current roles, only bigger. Your cash income doubles or triples.
  2. Detach. Choosing this path is similar to taking the Continue path, except you groom your top operations person or a new person to run the Company. You show up a day or two a week. Your income goes up less. You have time for other things (either a business with no connection to the company, or enjoyment of family and life).
  3. Replicate. Following this path, you shrewdly figure out what part of the Company’s success is replicable and you build one or two related businesses every 5 years or so that can each grow to twice as big as the company is now, or so. Some ways this could proceed:
    • Maybe the customer set is the replicable part. This means you figure out what else you can sell to the same companies.
    • Maybe the development and operations know-how is the replicable part. This means you find other large unmet needs that can be met with a similar approach for new sets of customers.

In this Replicate scenario, you would probably still have someone running the company’s base business, as in the detach option, but instead of showing up a day or two a week, you would show up 50 or more hours a week to build the new businesses. One way to get started would be to buy a business.

  1. Sell Out. You sell the Company and within two or three years retire or do something unrelated.
  2. Sell Up. You sell the Company and follow a career path with the buyer.

Choosing a Path

Step one is to look at your life today and pick out the parts you like the best and would like more of. For instance, do you enjoy conceptual creation of systems, or detailed implementation? People or ideas? Work or family? Money? Hands on management or running by the numbers? Being independent, or part of something larger? Then, look at which scenario offers the best fit. Then, investigate how feasible the scenario is and begin to make detailed plans if it looks promising. Without knowing intimately what you want from life, here a few of my preliminary observations:

I think the problem with Continue is that you will get bored. Although the business will require your full time, it will not interest you.

One fix for boredom is to put less time into, and get less fulfillment out of, the work part of your life, and switch more to other parts. The two scenarios that accomplish this are Detach and Sell Out. The challenge of detaching is that it requires truly transferring responsibility and authority to someone else. The challenge in selling is finding a buyer (a long process that’s often a dead end) and giving up control of your creation.

Another fix for boredom is to make work more interesting, and to put a lot of yourself into it. The two scenarios that offer this are Replicate and Sell Up. Replicating involves real work and real risk, and unfamiliar ground, but it does keep you independent. Selling up has the same difficulties as selling out, but could create career opportunities for you that your own company may never offer.

Selling out or selling up gives you some guaranteed financial reward for your years of work. If you replicate, you are essentially making yourself a buyer/investor instead of a seller.

The Rest of the Story

The founder/CEO chose to sell. He stayed to run the business, but not for long. Other key people on the team stayed longer. The business did extraordinarily well. Years later, the founder/CEO mildly regretted that he sold as soon as he did.

Delegation

By James Cannon Johnston

The CEO job changes at each stage of growth. The one constant is delegation to your managers. Delegation has to be retooled over and over. When you get it wrong, you burn yourself out or hold your business back or both. There are always three paths to choose from:

  • Abdicate. “I wash my hand of this. I’ve made it my manager’s problem now. She’ll sink or swim.”
  • Micromanage. “I’ll watch every move my employee makes and counsel and correct him in everything he does. I won’t let him fail.”
  • Delegate. This is the optimal path. The recipe for effective delegation is:
    1. Pick someone who can succeed at what you are about to require.
    2. Define target results clearly. You own the definition of success. This is usually not what you are delegating.
    3. Give the manager authority to make a plan. Insist that it include interim goals, action steps, and ways to measure progress.
    4. Approve the plan after needed iterations. Give authority.
    5. Monitor closely.
    6. Intervene when results fall short in an important way. Don’t let it drift. Don’t let it become your problem. Don’t accept the “monkey” back. Rather, ask the manager for the recovery plan. Keep the monkey on the manager’s back.[1]

If you figure out you picked the wrong person, you’ll have to do some micromanaging until you get the right person. If you figure out you had the wrong definition of success, change it.

[1] When I refer to the “monkey” I’m thinking of one of the most influential articles ever published in the Harvard Business Review: “Who’s Got the Monkey?” by William Oncken, Jr., and Donald L. Wass. It first appeared in 1974 and was included in the HBR again in 2007 with commentary by Steven R. Covey.

Four Motives of Entrepreneurs

by James Cannon Johnston

Entrepreneurs in the United States enjoy substantial respect, admiration, and even hero worship. But in reality, most people see entrepreneurs only within a simple popular caricature. They make assumptions and draw conclusions that fit this caricature, not the actual entrepreneur. This is a big problem because real entrepreneurs don’t fit within a single caricature and differ a lot from each other.

If you are an entrepreneur, the people around you, even those in close contact, don’t understand you very well. You may not understand yourself very well, when you come right down to it. I’ve realized, through working closely with many dozens of entrepreneurs, that they found and build businesses for four main reasons. The motivation that fits the popular caricature is to make a lot of money. Surely that is part of your motivation. But it’s not the whole story, even for the entrepreneur that is most similar to the popular caricature

1) Make a Lot of Money

            Making a lot of money is a reliable and important motivator. For some it’s #1. If it doesn’t motivate you at all, you might find it hard to build a sound business. Making a lot of money, aside from being something you want for yourself, is also a good indication that you are delivering a lot of value to society (unless you lie, cheat, or steal to make your money).

2) Prove Something

            Many entrepreneurs really want to prove something, to themselves, their parents, a former boss, a rival, or somebody. They want to prove they can succeed. They want to prove that an unconventional approach can, in fact, be made to work gloriously. They want to prove they are right about something important that most people don’t see.

3) Change the World

            If this is your motive, you want the world to become different and better because of your business. Something about the world just strikes you as needing to change. You want your legacy to include that you made a difference. You probably began to think about starting a business when you realized that it was the best or only way to cause the change you desire.

4) Be Independent

            This is your motive if you started your business to avoid having a boss, avoid having to explain yourself all the time to other people, and avoid being dependent. This motivation is a primal one that can carry you through the early phase of your business. But as your business grows, it will start to interfere with your independence—this is the entrepreneur’s paradox. You become interdependent with customers, employees, suppliers, investors, and lenders and you end up doing a lot of explaining!

            Think about entrepreneurs you admire (or not) and what motivates them. You understand the person and the business by understanding the motivations. This is especially worth pursuing when the person you seek to understand is yourself.

Get a Grip (On Your Business)

By James Cannon Johnston

Here’s a simple, life-altering way to be a better CEO. Post a 4×6 index card where you can often see it. On the card, write today’s date and what you think your business’s profit or loss for the current year will be. One month from now, write down a new date and a new value for the year’s profit or loss. If the number has changed, write a few words about why. If you’re unhappy with the change, take required action and reflect the positive impact of that action in your next entry. Do this each month until the year ends. This will change your life.

It turns out that a CEO gets a good grip on the business by knowing at all times what the business is on track to deliver and why. When the CEO’s team also has this grasp, life is good. As CEO, your job boils down to five things:

  1. Determine at the outset what the year’s performance can and will be.
  2. Commit to this within your team. Commit to your board and investors. If you don’t have a board, create one—so there’s someone to hear your commitment.
  3. Develop the sub-plans and interim milestones within your team to do what it will take to perform.
  4. Monitor continuously and make required changes as you go. This is where the index card comes in.
  5. Adapt and intervene and pivot as needed. Always keep hold of the thread that connects your current reality to your original intended plan

It’s all about conversations. The real value of getting a grip on the forecast is that you can initiate valuable conversations when there is still time to act.

I’ve seen that most CEOs, most of the time, struggle to answer the question: “What is your forecast for the year?” In January, you can answer because you’ve just done a plan. In December, you can answer it because (I hope) you know 10 or 11 months of actual results. Hello…December is too late. March through October is when you want to be monitoring and adapting. In a dynamic business, monitor every month.

How do you monitor effectively? That’s the real question, isn’t it? Here’s what the masters of this do:

  1. They know what performance has been so far this year and why.
  2. They work with the team to forecast what they now expect performance to be the rest of this year, and why.
  3. They add (1) and (2) together to get a total for the year. That’s an important step. It’s often overlooked.
  4. They compare this result to the original plan. If there is a shortfall, they act to recover. If the shortfall is unavoidable, they adjust to the new reality in time to avoid disaster.

Give it a try. If you like, send me the monthly entry you make on your index card. I’m at JimJ@JohnstonCompany.com.  I’d like to know how this works for you.