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The role management plays in seeking a small business investment

The most important factor in the success or failure of a small business investment (or the degrees in between) comes down to the leadership and experience of the management team, the interactions between team members and the strategic plan they create for the future of the business.  At Evolution, we spend more time on team health, trust, right people in right seats, core values and strategic planning than anything else.  In the words of the acclaimed author Patrick Lencioni, “If you could get all the people in an organization rowing in the same direction, you could dominate any industry, in any market, against any competition, at any time.”  This is what we believe and strive for at Evolution and we require the same of the businesses we partner with and invest in.  While a simple concept, don’t underestimate the difficulty, commitment and investment of time necessary to achieve.

First off, no strategic plan goes exactly as designed.  The best management teams are able to pivot their plan and capitalize on changes quickly to make the most of any new paradigm.  Management teams that fall in love with their original plan and are too proud or incapable of making the necessary changes, will at best, not maximize their  opportunity, and at worst, fail completely.  At Evolution we work with our management teams to not only have a five year strategic plan (first two years by month with assumptions), but we ask them to have a Plan B, Plan C and Plan D with “triggers” that would cause the management team to automatically move to another of their defined strategies.  This dynamic planning process provides the necessary clarity when the inevitable changes come to the original strategic plan and when emotion can take over.

The Five Dysfunctions of a Team as defined by Patrick Lencioni

The Five Dysfunctions of a Team as defined by Patrick Lencioni

Secondly, at Evolution we subscribe to Patrick Lencioni’s “trust pyramid” which, in summary states that in the absence of trust, management teams avoid conflict and by avoiding conflict they lack commitment, and when they lack commitment no one wants to be held accountable, and when no one is accountable there is a general lack of attention to results.  I am fascinated at how accurate this “trust pyramid” is in describing the real challenges even the most talented management teams suffer from.  We solve for this at Evolution by relying on the Entrepreneurial Operating System (EOS) designed by Gino Wickman that takes management teams through a process to create transparency and accountability in any organization.  The fact is that EOS brings misalignment and lack of trust to a head very quickly.  As a result of this, sometimes people do end up leaving the company, but both the employee and the company are better off as a result.  The employee is not stuck in an organization that they will not be happy in (if they are honest with themselves) and the company ends up with one of the greatest competitive advantages, a fully-aligned and trusting management team.

Once you have solved for the planning and the alignment, the business has a strong foundation to face any challenge.  One of the most difficult challenges facing any management team is obtaining small business funding from a third party, particularly private equity capital, where you are bringing on new owners.  In these stressful situations, even slight misalignment amongst management is often amplified and no small business equity investor wants to participate in a situation where management is not getting along.  Conversely, perfect alignment can also get amplified and the results turn out much better than expected.  As a small business private equity investor myself, I am willing to value a business much more highly if I believe that the company has solved for the aforementioned strategic plan and misalignment.  The reason for that is that as a small business private equity fund we need to move fast to obtain the internal rates of return that investors expect.  Not having to figure the plan and the management team out is very valuable.  How do I know that management has solved these challenges?  The results of their efforts present itself to outside investors with great, thorough and consistent answers to questions.  That each manager knows when to speak, because it is his/her area of expertise and the leaders of the business are comfortable “letting go” and allowing others to perform and respond because everyone on the team knows the plan so thoroughly.

I tried to simplify in a few paragraphs something that is very difficult to do well.  Developing a plan and getting alignment is a challenging process that really never ends.  At the end of the day, we are talking about people and relationships, which need to be continually fed and cultivated.  However, if achieved, the rewards are enormous.

For further insight as to the value of what has long been categorized as an “intangible asset,” check out a study performed by Deloitte entitled The leadership premium: How companies wing the confidence of investors.

Posted by: Jeffrey Kadlic

A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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