Founders Do It Better

The Harvard Business Review created an index of companies that were led by their founders and compared this with companies in the S&P 500 led by “hired guns”. The founders outperformed the “guns” by 3.1 per cent over the measurement period of 1990 to 2014. But that includes tech companies I hear you say. Well, after removing those the founders still outperformed by 1.8 per cent and generated 31 per cent more patents.

Intuitively it makes sense that entrepreneurs who often spend a lifetime building their businesses would be more obsessed and more innovative than someone who joins as an employee. The founder does more to create value than the successor.

The study concluded that the founders didn’t necessarily occupy the top leadership spot in the company. They might be Chief Creative Officer, Chair of the board or even a vocal shareholder. They influence but need not be running the day-to-day operations.

Successful founder-led companies had ingrained innovative cultures looking for ways to solve problems with an obsessive focus on customers. Constant improvement causes disruption which creates growth.

Founders too, tended to have more skin in the game sometimes the bulk of their net worth. Professional CEOs don’t have the same financial commitment and maybe having less at stake leads to less intensity?

It is perhaps ironic then that a buyer particularly a strategic one, typically willing to pay at the top of the sales range, is going to make sure that the business can continue to perform without the owner/founder. A financial buyer may be attracted by what an owner/founder has created but will recognize that an investment that hinges on a single person is high risk. Both recognize that by removing control and financial risk from the founder she may not be as driven to create wealth as previously.

Many owners know who their buyer will be but that doesn’t mean that they will secure top dollar. They need to demonstrate that they have organized themselves out of their business and that’s counter intuitive and difficult for someone who understandably, will be emotionally invested in their life’s work.

Clearly to make the most of their efforts owner managers need to change outlook as they start to contemplate an exit. We call this the succession runway and it is where owners who don’t do this every day need help. Failure to prepare leads to those dreaded words an owner never wants to hear; holdback, workout or discount. Distancing yourself from your business doesn’t happen overnight or come naturally – that’s where we come in. Call us to find out how we make this process both profitable and painless.