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A couple of years ago I sat down with a business owner of a very successful technology firm that had been around for fifteen years. Situations like the following story motivate me to keep looking for ways to share principles I discover that hopefully keeps headaches, lawsuits, bankruptcies, and even complete dissolution of companies from happening.
One day during lunch with a technology owner, an issue surfaced that he was at a loss to interpret. Once he announced to his existing employees that the ownership would be changing over to his key employee his company experienced 90% employee turnover within one year. This key employee had been with him for over ten years, and many of the employees under him were employed almost as long. Which may indicate great management to employee relationships. So this prompted further questions, and after numerous answers to specific questions, the answer started to reveal itself. The owner then went on to describe how he couldn’t understand why his key employee, who at that stage owned 40% of the company, had been more concerned about his salary above his future employees during the last downturn. And how, as a new owner, the key employee indicated that clients should stop complaining and accept what he felt was best for them. His key employee, before ownership, had never indicated to him that this was his philosophy and the owner was spending quite a bit of effort to change this attitude to salvage his exit.
The longer we talked, the more I was convinced that the owner lived one business model, and his key employee lived another business model. Or maybe you call it a philosophy of sorts that drives a company.
This business owner’s model (#1 above) is my preferred and only common recommendation. That is to put your clients first, then your employees and lastly, structure your company, so your clients and employees take care of you. Some owners will tell me this concept sounds too idealistic and simple, but I can assure you that I’ve seen it generate a great number of growth opportunities and scalabilities for a company. The risk is that this concept can crumble fast if the structure of the company is not set up to reward the owner and revert to the “Ouch” model.
The key employee’s model (#2 above) is one I will never recommend. That is to put yourself, the owner, first and then your clients second and leave your employees to fend for themselves. Since employees generally are looking for safety in employment, this model, in my opinion, does not offer much in the way of that. Believe me when I say that when employees are left to fend for themselves, they often do in ways that are not healthy for the company. If I were a government inspector, fraud investigator, or forensic accountant I would look first for businesses with this model, as my probabilities would be very high for finding those “Ouch” moments (lack of compliance, theft, fraud, etc.).
So why do I believe the reason so many employees left? Although the employees were aware of the key employee’s model, they always relied on the owner’s model to supersede. But when the announcement came, it ripped away the only safety net (owner’s model) they understood and left them feeling scared.
When employees feel scared, they run to anywhere they can feel safe and often, like in this case, into the arms of the competition. And now this owner was left with a potential owner that would likely destroy his company without great employees and a company with a lot less value to take to a third party if he was to change direction.
As always, I look forward to your feedback and comments.
John Hamel is the Managing Member of Austec Business Transitions, LLC. helping businesses optimize value relative to exiting their company.