The Kingdom or the Crown: Address the Owner Dependence Dilemma in Your Company

Permanent Equity is a private equity firm based in Columbia, Missouri. In this newsletter they discuss at length which keeps us and many of our clients awake at night – namely, what will happen to a successful franchise when the Founder/Promoter is no longer around. We worry about this both from the perspective of being Founders of Marcellus and from the perspective of being shareholders in several successful businesses which are run by a Founder. If you too worry about such succession planning issues, you should read this piece in full.
The piece begins by capturing the essence of the ‘owner dependence dilemma’: “…it’s easy to see how the very qualities that got you where you are could keep you from where you’re going, whether that’s growing your company, selling your company, or preparing for the unexpected.
The reality is that if your business is dependent on you, it’s less attractive to investors, harder to transition to new ownership, and unnecessarily chaotic to wrangle if something happens to you.” This is the ‘Kingdom vs Crown’ dilemma.
The Permanent Equity team then lays out a mental model around which think about this owner dependence dilemma: “When you’re thinking about whether, how, and when to grant authority to other stakeholders and attract more resources to your business, there are real tradeoffs that you must consider. They fall into three primary buckets: Control vs. Growth, Control vs. Strategy, and Control vs. Valuation and Transferability.” The authors then go through these 3 issues one-by-one. Each of these issues is a separate dilemma.
Control vs Growth: “…even if you have no intention to sell in the short or even medium term, maintaining a death grip on your business as you try to scale will undercut progress and stunt growth….Sometimes, for periods of time, wealth creation/growth and control can be aligned. But that stage is fleeting, and, eventually, you have to pick a lane.”
Control vs Strategy: “In terms of decision-making, micromanaging the day-to-day operations of your business costs you the ability to think and act strategically. It’s a bit of a paradox, but for most owners, controlling every decision from the budget for capital improvement projects to the paint color on the office walls is actually the easy way out. Hiring good people, taking the time to train them effectively, and giving them real autonomy and authority is hard, time-consuming, and doesn’t necessarily pay off until months or even years down the line.
This is particularly visible in hiring, where we’ve seen many owners who are hanging onto control because they’ve been burned by delegation before. A less qualified individual, fraud, slower pace of production…there are any number of poor experiences that might start a feedback loop validating an owner’s belief that there’s no one out there who can do the job.”
Control vs. Valuation and Transferability: “When you reach a point where you’re ready to sell your business, transfer leadership, or attract real outside resources, buyers and investors have very little confidence in businesses that are reliant on one person. Great businesses can be untransferable. If you’re the sole keeper of the business’s reputation, key customer relationships, or institutional knowledge, your business is worth less to someone who is not you.
You’ll think and act for the long-term if you’re interested in financial gain. Research shows that, in small and medium-sized businesses, when there’s an opportunity to release some of your individual control, you should do it. In fact, on average, each additional degree of founder control reduces the value of the company by 23.0%-58.1%…” 
The rest of the piece then goes through steps that Founders can take to address the trilemma highlighted above.

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.