Governance and succession for founders who would rather not find out about the fine print after completion.
There are many excellent ways to celebrate selling a business. Champagne is traditional. A holiday somewhere unnecessarily expensive is also acceptable. Buying a car you previously described to your spouse as financially irresponsible has a long and distinguished history.
What I wouldn’t recommend is discovering, three months after completion, that someone you have never met is now chairman of the company you spent twenty years building.
I’ve spent my career on the deal side, and I can tell you this happens more often than owners admit afterwards. Not because anyone behaved badly. Not because the buyer breached anything. Usually everybody is doing precisely what the documents say they can do.
Which is the problem.
Governance is dull until the moment it isn’t
Say the word “governance” to most entrepreneurs and you can watch the life force leave them. It sounds like committees, minutes, and a man called Nigel asking whether item 7.3 should go back to the remuneration subcommittee.
But strip away the industry that has grown up around it and governance answers four questions. Who decides? Who can stop them? Who appoints the people who decide? And what happens when the person who has always made every important call is no longer the person in charge?
In most founder-led companies, the answer to all four is the same: ask the founder. Can we hire her? Ask the founder. Can we open in Manchester? Ask the founder. New coffee machine? Best check.
This works well at small scale, largely because the founder is usually bright, energetic and across everything. It works less well at forty-seven people. And when ownership changes, it stops working altogether.
The completion that went perfectly
Twenty years of building. An investor appears. The numbers stack up. Due diligence is survived, the lawyers stop emailing at 11.47pm, everybody signs.
A few months later the new shareholders exercise their entirely legitimate right to appoint a chairman. They pick someone the founder wouldn’t have trusted to chair the village fete.
The founder is incandescent. The founder also agreed to it.
This is what founders miss when they treat a sale as a conversation about price. It’s a conversation about power. Who controls the board. Who appoints directors. Which decisions need consent. Whether management can be replaced. Whether the founder can be replaced.
Those terms can matter more than whether the headline number is £20m or £21m, and considerably more if you’re planning to stay.
What we see when it’s been left too late
Sitting where we sit, the pattern is legible well before completion. Weak governance shows up in diligence as risk, and risk shows up in the price. It shows up in the structure too: more of the consideration deferred, longer earn-outs, tighter conditions, more control ceded because there is nothing else to reassure the buyer with.
A founder who has focused entirely on valuation while ignoring governance can pull off the impressive feat of winning the negotiation and losing the company.
Kate Smyth on building the structure
I agree that governance usually invokes a visible shudder from most founders I meet. The governance they have seen belongs to a company twenty times their size, with a company secretary and a subcommittee for everything. They look at it and decide it would strangle them, so they carry on as they are, the business grows, and the gap widens.
As with everything in a scaling business, it has to be fit for purpose. Governance built to fit is the frame you grow the plant up. Tomatoes get taller and carry more fruit when there’s a structure holding them, and they get there faster. Leave the frame out and the plant sprawls, and the fruit ends up on the soil where it rots. The frame is what lets the plant get big.
Many founders meet this issue long before they look to sell, but don’t know it may come back to haunt them if it’s not dealt with.
A founder builds a £5m business and runs it superbly. At £5m, knowing every customer and signing off every hire is a real advantage. Then investment comes in and it becomes a £20m business with four times as many people waiting on an answer. The founder is still running it the way they ran it at £5m, and the things that made them effective have turned into the reason everything queues. Speed and instinct hold up beautifully until the day they stop, and that day arrives without an announcement.
Investors tend to spot the ceiling before founders do. They test whether anyone other than the founder can answer a question about the numbers, and whether a decision made while the founder is away still stands a week later. Are there independent voices bringing challenge and rigour to company decisions, are there actually board papers and minutes – and what got decided. What they are measuring is the distance between the size the company has reached and the way it is still being run.
Governance is smaller than you think it is
Governance is the set of agreements that let good decisions get made when you aren’t in the room. Four things carry most of the weight, and none of them need a committee.
Decision rights. Write down what management decides, what the board decides and what shareholders decide. Many small and medium sized businesses have never written this down, which is why everything travels upwards to the founder by default.
Information. A board can only be useful if it knows what’s happening. That means a short pack in the same shape every time, arriving before the meeting rather than during it.
Composition. The right people round the table, including at least one who doesn’t work for you. An independent voice you chose is worth a great deal more than one you were handed.
Succession depth. A leadership layer that can run the business while you’re away. Test it by seeing how often you need to ‘jump on a call’ when you’re away on the family holiday abroad.
Any business past £1m needs some objectivity in the room. Someone with no stake in keeping you comfortable, who will ask why the sales number moved and won’t accept “it just did.” What changes with scale is the form that takes. At £8m that might be one experienced independent and a monthly rhythm everyone actually keeps. At £80m you need a constituted board and a chair capable of telling you no. Removing a chair you appointed yourself takes months and a resolution. Removing one appointed under a shareholders’ agreement may not be within your power at all.
Governance that ties a business in knots has almost always been copied from somewhere it fitted and dropped somewhere it doesn’t. That’s a design failure, and it’s fixable.
The 51% question
Ask yourself what a new owner could do the morning after completion that you would hate. Appoint their own chairman, replace your management team, change the strategy, sell off a division. Then go and find out which of those they could actually do. The answer is in your articles and in any shareholders’ agreement already in place, and most founders have never read either.
Whatever governance you have when a buyer arrives becomes your opening position. A buyer who finds a board that works, with independents already in place and decisions being made at the right level, usually leaves it alone. A buyer who finds one person holding the whole thing together will write terms that deal with that person, and they will be entitled to.
The gap between those two outcomes is a couple of years of work, and none of it can be done during a sale process.
If this article has you wondering if your business is ready for sale, contact Chris.
Chris Grove is co-founder and CEO at Archer Fleming, advising founders and shareholders on sale, investment and completion. Kate Smyth is an organisational design adviser and non-executive director, and founder of Meraki People working with founder-led businesses on board structure, decision-making and leadership succession.