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Twelve years into my ownership of the company, it became obvious to me that growing it to the next stage would not be as interesting or challenging to me as my early years of fixing things and turning the business around. After a first aborted attempt to sell the company in 1999, the final private equity bidder provided us a loan in exchange for an option to buy along with a board seat so we could hunker down and weather out the Telecom/dot.com bursting bubble; I was still able to retain 100% of the equity. We watched our revenues drop from $37 million to $10 million over the course of two years! The plan was to pay off the debt and sell the business after recovery once we had a solid few years of EBITDA growth and had gotten our sales back to previous levels. The PE guys on the board suggested many other things for us to consider.

Since I had done nothing about management succession, I had toÿ “replace myself” as President.ÿ I was the only outside salesperson in the company and had found a manufacturer in Singapore to help us support our growing shipments to Asia.ÿ Most of my direct reports had been promoted up from within the company.ÿ We had no purchasing department, and IT systems were primitive and maintained by Debby or myself.ÿ I led most of the manufacturing initiatives that brought our lead times down from 8 weeks to 3 weeks, and Debby was spending a couple of days a month pulling all-nighters to close the books.ÿ I was a lousy delegator and loved being involved in all the details of the business; I had run larger companies in the past and was not excited about the prospect of leading us into the next levelÿof growth.

Having received an unsolicited resume across my desk from a 15-year-out graduate of a well-known Eastern business school, I dropped the dime to call him in for an interview.ÿ He had run small units of large companies and was ready to dive into an entrepreneurial venture.ÿ After interviews with the staff, the PE firm and Debby, he was hired, along with our first commitment to a severance package and a written agreement to earn 1% of our selling price for each year he worked until the business was sold.ÿHe quickly recruited a management team, including a Sales Manager to set up a sales force, a CFO to install an ERP system and to replace Debby, and a Manufacturing Manager to strengthen our operations.ÿ Debby and I worked hard to give him latitude and to support his efforts despite some rumblings from the board.

However, after 18 months of observation, the board and the staff urged me to let him go, and after 6 months of effort to coach him, I did.ÿIt was difficult – I was impacting someone else’s life in a big way because I had not done a thorough hiring process.ÿ While successful in assembling a team, he had not shown the leadership or vision to develop the trust that board, staff and employees wanted to see.ÿ Employees were relieved, and I took back the President’s role again.ÿ The board had acquiesced to my preferences during the interview process, and I had badly wanted it to work out, so much so that I was not seeing the problems.ÿ

When the board suggested a recruiter from its search firm, Spencer Stuart, to find the next candidate, I was shocked by the $75,000 price tag.ÿ But she spent lots of time with myself and Debby, knew what kind of CEO the PE firm liked to see and presented some great candidates.ÿ It was well worth the price – the cost of severance for the first mistake had been a much higher price to pay than the recruiter’s fee! ÿ

Having a management degree from a European business school, the new President was a quick study and right away established rapport with the management team, PE firm and employees.ÿ He was “incentivized” to be aligned toward improved EBITDA, expanded our manufacturing base into China, refined our sales channels and positioned us to be attractive to a “financial buyer” 5 years after he came on board. ÿHe did a great job in “managing” a husband and wife team, and Debby and I stepped into background roles. ÿOur margins never recovered to our historical rates, primarily due to my relinquishing my direct control of pricing, but we paid back the loan and the PE firm moved on.

Delegation was not much fun for me.ÿ I missed the customers and the day-to-day give and take in operations but knew that I had to hold my tongue and let the new guy take over the CEO role.ÿ I focused on supporting product development, refining the ERP system and training while Debby kept busy with environmental and legal matters.ÿ Employees got comfortable with us letting the business move on, and we felt that transition to new ownership would be smooth and not disruptive to the employees, vendors and customers who had grown with us. ÿNine years after we started the process, revenues finally returned to previous levels, and we were able to exit entirely after finding another PE firm to take full ownership! ÿTheir major consideration was the strength of the management team led by our CEO.

If you have comments…website or letters to editor. The Harbus and Jim would love to hear from you at letters@harbus.org, or comment online at www.harbus.org.

AUTHOR’S BIOGRAPHY
Jim Sharpe (MBA `76) is one of theÿHBS Entrepreneurs-in-Residence for the 2009-2010 academic year, who ran an aluminum manufacturing business for 21 years while working with his wife, Debby Stein Sharpe (MBA `81) after both left careers at GE and large companies and sold the business in late 2008. Jim can be reached at: jsharpe@hbs.edu, 310 Rock Center, 617-496-6285 or sign up on his wiki for office hours or Brown Bag lunches at //wiki.hbs.edu/confluence/display?Sharpe/Home.

April 4, 2010
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