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18 FEDA News & Views continued on page 20 Understand that these characteristics are gradations on a wide scale. Where Plan B Comes In Old men always stay too long, and denial is much more than a river in Egypt. Entrepreneurs will always age out. If they are still the center of all decision-making, and they leave, the busi- ness invariably fades and fails. This is the No. 1 driver of mak- ing a transition to being professionally managed. Becoming professionally managed creates value independent of the CEO- entrepreneur's direct contributions. This may be to prepare for a transition to a relative or an employee buyout agreement. Or, it may be to prepare for the recruitment of a professional employee executive and board for oversight. The alternative is to sell the business to an outsider. The data below was developed for a research project we conducted for the National Association of Wholesaler- Distributors back in 2003. It shows growth rate relative to the industry as a function of fi rm age. Growth at 0 on the vertical axis indicates that the fi rm grew at the same rate as its indus- try peers between 1998 and 2002. Any values above the line indicate that the fi rm gained share by growing faster than the rest of their competitors. Below the line indicates share lost as they fell behind. Firms between 40 and 90 years of age grew slower than their peers, and they lost share. After 90 years, they returned to growing faster than their industry peers. We understood the early decline in growth rates as it is easy to have high growth rates when you are very small. It becomes harder to sustain that as you grow. We fi gured the loss in share years was due to entrepreneurs who aged out and rode their businesses down. We didn't understand the return to share growth after 90 years of age, so we asked those fi rms why. The answer: They said they had learned to recognize fam- ily members who performed badly as leaders and to change before they destroyed the fi rm. These older fi rms were able to do this because they had boards and real executive oversight, a core characteris- tic of professionally-managed fi rms. Many aging entrepreneurs don't start thinking about succession until they retire. Remember the genetic bias to react quickly rather than delib- erately? This often becomes a fatal fl aw as health crises are rarely scheduled. A shareholder alternative analysis—the fancy term for this aging-out succession plan—really needs to be done well in advance of any change in management. It's a deci- sion that has to be made intentionally, rather than reactively. Helping clients through this has been a part of our consulting practice for decades. Most privately-held fi rms choose to keep the business in their families and usually set up a board and at some point bring in an employee CEO. The transitions of oper- ating management and ownership are very different and need to be handled separately. Advisors who combine these two very different challenges and then optimize business choices to minimize tax liability have destroyed millions of dollars in shareholder value. At the heart of this transition of operating management is a switch to professional management. The interesting part of this transition is that it can happen when the CEO-entrepreneur decides it should, and this can be now or when they are pre- paring to exit the business. The other driving factor is that a professionally-managed fi rm is usually worth signifi cantly more than a lifestyle busi- ness. In private equity parlance, a platform fi rm gets a higher multiple of EBITDA earnings, and is professionally managed. The reason is that it is already positioned for significant additional growth. An add-on acqui- sition is typically a life- style business that can be integrated into the plat- form fi rm. The Obstacles It is hard for any CEO- entrepreneur to cross the lifestyle-to-professional Crossing the Chasm continued Many aging entrepreneurs don't start thinking about succession until they retire. Remember the genetic bias to react quickly rather than deliberately? This often becomes a fatal flaw as health crises are rarely scheduled.