Remember the days when supermarket delivery was not commonplace? Remember when parents with two-year-old’s in tow waited in cue in the checkout aisle where far too many tempting choices could prompt their toddler’s meltdown? It still happens: The scene usually has the child lying prone on the floor demanding some shiny object and being disagreeable in a loud and obvious way.

Only shoppers without children could view such a scene and ask: What’s wrong with that child; or, why doesn’t the parent control her child?

However, those who have been through this drill look on sympathetically at parent and child and understand that the child’s behavior is to be expected. A clinician might label the behavior as being developmentally appropriate for a two-year-old, that is, a developmental milestone where a toddler’s emotions have out-sized his language, and therefore his ability to understand and articulate his feelings. With time and nurturing the child will soon outgrow this state of confusion, which will be remembered as one of the first of many growing pains.

Businesses have growing pains too. Most businesses are begun as lifestyle businesses by an entrepreneurial man or woman hoping to support family. Entrepreneurs are different, in a magical way, from most of us who pursue more conventional, structured career paths.

Entrepreneurs possess special skills. Common qualities in many entrepreneurs include unbridled initiative, innate economic prowess, and laser-like focus on the goal—unburdened by structure, process, or formality. Many of these qualities, though core to the magic of entrepreneurship, represent the seeds of dysfunction later in the life of the company when the business has attained a critical mass. At some point in the growth arc of the business, the qualities that have enabled the entrepreneur’s magical brand of open-field running are no longer effective drivers of the business.

Entrepreneurs who are fortunate enough to reach this growth point inevitably come to experience pain and frustration. Just like the child on the supermarket floor, these frustrations are not fully understood, and often the entrepreneur is unable to articulate what is needed.

Painful and unpleasant though it may be, as with the two-year-old, the entrepreneur’s state can be said to be developmentally appropriate; as, at some point in the growth arc of a business every business outgrows the ability of any one man or woman to be the omnipotent force within the organization.

Systems of organization and governance are now needed for the business to move forward effectively. But these disciplines have never been modeled for most entrepreneurs and, for many entrepreneurs, the entrepreneurial path was chosen, in part, to avoid the confines of organization.

One of three things happen when the entrepreneur and her business reach this point. Some fortunate entrepreneurs, with the help of others, adapt to their new environment and transcend this painful place on the growth continuum. Others fail, often because the entrepreneur loses control of her business and encounters a bad surprise. Finally, many of these entrepreneurs, believing they have no practical alternative, choose to sell. And given the burgeoning of private equity capital in our system, selling these days has never been so easy.

The unfortunate consequence of entrepreneurs’ selling while their organization is in the midst of this developmentally appropriate dysfunction is that they will likely sell for multiples below market. In fact, there are some private equity funds which prey on companies in this very state. They buy such businesses at below market multiples, introduce proper systems of organization and governance, and then flip these companies, often to other private equity firms, for street value. Such private equity funds, therefore, create their value by addressing the very dysfunction which the entrepreneur lacked the will, foresight or assistance to address on her own.

Here the trusted advisor can add real value: first, by recognizing when the client has reached the tipping point where the client’s informal entrepreneurial culture has run its course and something new is needed. This recognition is not as easy as one might think. As discussed in a previous edition, the entrepreneur usually articulates the pain she is experiencing by focusing purely on symptoms and not on the underlying causes, which may be unknown to her.

Second, the trusted advisor can educate the client, who is likely exhausted, frustrated and confused and in search of relief. Clients in such a state may be exceptionally vulnerable to the regular and repeated overtures being made by representatives of private equity funds.

And, finally, by securing for the client an advisory group which is experienced at assisting entrepreneurs transcend such developmentally appropriate dysfunction, through the implementation of systems of organization and governance in a manner sensitive to the nuances of the business and family, and, most importantly by modeling the practice of governance.

Just as the parent in the supermarket may best help her child through his tantrum by offering calm reassurance and understanding, so too, the trusted advisor may best help the client by providing calming assurance and understanding. Clients will be comforted by the understanding that they are not deficient in some way, that their pain is developmentally appropriate, and that, with help, the business may transcend its present state.

Entrepreneurs who successfully navigate this challenge will have gained for themselves and their family’s choices beyond simply selling at a discount—almost as many choices as found in the supermarket checkout line.

Until next time …
The Owl

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