Maximizing ESOP Valuation Values

Maximizing ESOP Valuation Values by Jack Veale an ESOP Advisor.

To maximize the value of a company, reliable projections from a reliable management team is the most common predictor of success.  Valuation firms commonly use the "Discounted Cash Flow" or DCF as a key weight in valuating the company's stock value. That is why companies dependent on one or two key people get valuation discounts.  If your company is lacking in management depth, you need to determine if you need management training or leadership development, or both! 

One of the key elements of an early ESOP transaction is the implementation of succession planning.  Too many ESOP companies have not developed a succession plan to improve their legacy and remain an independent ESOP Company over time. Having over 30 years of Succession experience with over 300 family owned and ESOP companies has led me to define the Succession process in two distinct challenges: Management Training and Leadership Development.  For founders of an ESOP company, an effective transition can be their most important challenge in their entire career.  Typically, they have never experienced a smooth transition, and they may have control issues that prohibit the natural development of their primary buyers: the employee owners!

 In simple terms, Management Training is the process of educating the pupil with best practices, skills development, and management theory.  Typical activities include communication techniques, time management education, problem solving techniques, goal setting, performance reviews, with classes on change management and team building, just to name a few.   Almost all of these activities are formal training events with some form of presentation, by class, by online/intranet tools, or one-on-one teaching/coaching.  The goals for management training are to improve a person’s ability to manage a process, problem, or system, with or without others.  The result is to improve organizational efficiency by reducing mistakes, improving throughput, and or managing change events.

Leadership Development involves a totally different set of experiences, approaches, and outcomes.  Its focus is to improve organizational effectiveness.  From advising over 300 CEO’s, I found one of the most important aspects of being a successful ESOP CEO, is their capacity to deal with ambiguity, when their decision is “betting the business.”  That means they have, over many years, developed the capacity to make decisions without having all of the facts, can motivate others to perform at a higher level, and have acquired diverse knowledge, wisdom and ethic to discern truth from fiction, and take risks that others would otherwise avoid or prohibit.

Management Training typically involves some form of curriculum and checklist identifying skill sets; that when done properly, reflects the pupil’s level of competency, and integrates with performance reviews and incentives.  Leadership development isn’t always about performance and success.  It is about experiential events that put the pupil through a series of experiences that increase their confidence in dealing with changing situations, motivating others in difficult times, and building a portfolio of stories that demonstrate both success and failure over time.  Tears of failure are some of the most important experiences a future CEO can have that will, over time, be the basis of future success.  Concepts of having a vision of the future, and “self-efficacy;” that is, a person’s ability to complete tasks and reach goals, are also involved with this effort.

Selecting pupils for leadership development can be very difficult.  How do you measure a person’s motivation to learn, have a high need for achievement, have the capacity to remain focused under stress,  are open to new experiences, and have the ability to make decisions without all of the facts?  Do they have the courage and conviction to withstand the resistance that occurs with change?  Have they survived a serious failure and turned it into a future success? Do they have the confidence to achieve results without sacrificing their personal ethic?  Where do you get concrete experience that forces the pupil to experience both success and failure?  Does the leadership team encourage and nurture these demanding pupils or victims, depending on your point of view? 

The secret to having a successful leadership development program is the organization’s willingness to accept failure as a competitive advantage; when managed properly using teams. It also requires integrating management training with leadership development.  They can’t be separate.  Does a failure end the pupil’s career path or enhance it?  We use team building processes in conjunction with problem solving training to reduce the risks of failure.  Incorporating “train the trainer” events, and advance management theory to advance a pupil’s experience will make a difference.  We also emphasize personal development with coaching and mentoring processes, when teams affect change. 

If you embark on this effort to develop your CEO’s replacement over many years, be mindful it is a change management event.  Every successful ownership transition requires a different set of skills then the ones that got you there.  In other words, the skills that helped the current CEO get there, usually are not the same skills that will take the company to the next level of growth and profitability.  It is this challenge that ESOP companies fail to grow and engage others to perform to a higher level.  Do you have a succession plan?  Do you have an organization that encourages risk, change and organizational effectiveness?