Lesson #375: Why Having Co-CEOs is Usually a Bad Idea

 

Oftentimes, two co-founders think it is a good idea to share CEO responsibilities, as Co-CEOs.  The logic being they can separate their roles and responsibilities, with one person leading certain departments (e.g., sales and marketing) and the other person leading other departments like (e.g., technology and operations).  The reality is, this is a pretty bad idea.  The business should only have one leader at a time that can “lead the ship” and make sure everything is perfectly coordinated across the entire company.  This post will teach you the potential pitfalls of a Co-CEO strategy.

Lack of One Sole Vision/Control

Anytime you add additional people to a decision-making process, that is most certainly going to involve you making some sort of compromise, where you are not doing exactly what you would have done if you were a stand-alone CEO.  On minor points, it probably doesn’t matter.  But if it is important strategic level points you are compromising, you end up diluting your own personal instincts and convictions.  And it is those same instincts and convictions that are often the difference between good outcomes and average outcomes.  You never want to be in a position of “managing towards the happy middle-ground”. 

Lack of One Sole Voice With the Team 

When there are two leaders, and those people are not necessarily in 100% alignment on the vision, they may be saying conflicting things to the team, in terms of the directions they are providing to the staff. That can create a lot of confusion with the team members, as they are unclear on whose voice to listen to the most, as they are both Co-CEOs.  And worse, it makes it look like the Co-CEOs are not in alignment, and are not communicating well with each other, which has the team nervous that leadership at the top doesn’t know what they are doing. 

Lack of a Tie-Breaker

What happens when the two Co-CEOs cannot come to an agreement on a topic?  There is no one there to break the tie.  Which either creates a level of paralysis where no decision gets made and the work doesn’t get done at all.  Or, it requires one of the Co-CEOs to back down, and agree to the other Co-CEO (usually with the louder voice and personality winning).  And that can create resentment towards the other person who is constantly not getting their opinions listened to or acted upon.

Different Management Styles Could Cause Friction

No two people are exactly the same; what happens when there are philosophical level differences in management approach.  Let’s say one of the Co-CEOs is a “top down” strategic level thinker that likes to “see the big picture forest” and the other Co-CEO is a “bottoms up” execution level thinker that likes to “live in the trees”.  Those two styles are completely different ways to make decisions and can easily “ruffle the feathers” of the two Co-CEOs over time, forcing them to think and act in ways that is not their preference.

You Lose Control on Half of the Business

If you are the “Sales & Marketing” leading Co-CEO, that doesn’t mean you don’t have opinions on how “Techology & Operations” are being run by the other Co-CEO.  But by dividing up the responsibilities, you are basically handing off all decisions in those other departments to the other Co-CEO.  If you trust the other person to operate alone in their silo, that is fine.  But what happens when you have a fundamental disagreement on how those other departments are being operated?  You can communicate that to your Co-CEO to try and fix it, but it is ultimately up to them to make the desired changes you want, which they may or may not do.

Your Co-CEO Refuses to Stay “In Their Swim Lane”

Even though you may have divided up the management responsibilities with your Co-CEO, that doesn’t mean they will always stay in their “swim lane”.  CEOs that like to lead and control, typically have a really hard time giving up control to anyone else.  And when that “likes to control” Co-CEO, starts drifting into the “swim lane” of their other Co-CEO, having to have input on every decision in their departments, that will really piss off the Co-CEO.  At that point, you don’t really have a Co-CEO structure at all, with one person needing to control all decisions.  That will end up very badly.

Limits Your Exit Options

When it comes time to sell your business, the new buyer would prefer to have one CEO be their sole decision maker, with which to sit on their board and work with the investors.  Also, when you are ready to sell, your Co-CEO may not be ready to sell.  Now you are stuck owning and working in a business that you no longer want to be working in.  Or worse, your miss “your open window” to sell, and market conditions change by the time your Co-CEO is finally ready to sell, but now the window has closed and you can’t sell.  You never want to be in a situation when you can’t get an exit for your equity, handcuffed by a Co-CEO’s opinion, when you see an exit as the right path forward.

Closing Thoughts

Hopefully, you now have a better understanding of the challenges at hand when you are considering a Co-CEO setup for your business.  There are examples where Co-CEOs have worked together perfectly—think the Google founders (Sergey Brin and Larry Page).  But more often than not, it ends up not working out very well at all—think the Salesforce executives (Marc Benioff first with Keith Block and then with Bret Taylor).   So, if you are considering this Co-CEO path, buyer beware, as it is ripe with potential pitfalls and most likely will not end up working well for the Co-CEOs, the staff or your investors.

For future posts, please follow me on Twitter at: @georgedeeb.

 

 

[VIDEO] Why Product-Market Fit is Critical For Startup Success

 

I was recently interviewed by ASBN, an online "television network" serving the small business community, about the importance of identifying product-market fit for a startup's success.  This video will help you learn what that means, how you attain it and how to measure it over time.  I thought this video turned out great, and I wanted to share it with all of you to make sure your new product launches have the highest odds of long-term success. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

When to Sell Your Business--Before It's Too Late

As a founding entrepreneur, it is hard not to always be "in love" with "your baby". You created something from nothing, you nurtured it along the way, and you built something really great. Until the point "your baby" stops growing, your profitability falls with increased competition, and the roller coaster starts picking up speed in the wrong direction, with revenues going down, not up as before.  It is very easy to want to "stay the course" and hope for things to get better in the future. Depending on the root cause of the fall, like a temporary decline in the economy, it very well could rebound. But, there are times when the root cause cannot be fixed, or worse yet, will continue to "snowball" in the wrong direction.  In those scenarios, you need to know when to pull the "ripcord" to save whatever value you have left before your business is worth zero. This post will help you identify what to look for and how to get you and your shareholders a "soft landing" when things start to turn south.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] The Four Pillars of Equity Distribution For Startups

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how best to split-up the equity between cofounders of a startup.  This video will help you learn how to handle all the key drivers here, like if the cofounder is investing cash, if they are deferring salary, their role in the company and more.  I thought this video turned out great, and I wanted to share it with all of you to make sure all cofounders are being treated fairly upfront, so there are no debates about equity interests in the future. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #374: The Top 5 Reasons Why People Buy a Business

 

Many entrepreneurs go down the path of buying a business to help jump start their business building efforts.  But oftentimes, they don’t give enough thought to WHY they are buying the business, and their long term goals they are hoping to accomplish from this investment.  Unless they are 100% clear on the “end game”, they could get themselves into a situation that is not what they intended, and it could be too late to fix it once they close on the purchase.  This post will help you assess your acquisition goals before you get started hunting for targets, so you don’t repeat the mistakes that many other entrepreneurs have made by not doing sufficient homework upfront.

Let’s talk through the various reasons why people buy companies:

1.  You Need a High Return on Investment

Like any other investment, you want it to be worth as much as possible at the time you are ready to sell it.  This path most typically involves buying a business at a low price, increasing its value over the next 5-10 years through increased sales and marketing efforts or other margin enhancement techniques, and then selling it for a much higher value down the road.  And that higher value typically comes from two sources:  the higher profits of the bigger business and the higher sale multiple of earnings, as bigger companies are typically sold at higher sale multiples than smaller companies.  But the intent here is to buy and sell the business—that is the intent from day one.  And it may or may not require you raising outside capital to assist you with the purchase or your scaling efforts.  If all goes well, you sell the business at 5x-10x the price you purchased it, and that is when you get your “big payday” as a shareholder.

2.  You Need Current Recurring Cashflow  

In this category, it is less about growing a business, and more about “milking it” for recurring cash flow from whatever size the business is today.  Here it is less about shooting for the highest long-term ROI possible, and more about driving the highest near-term annual return on invested capital.  These investments can be things like buying a car wash, a strip mall to rent, or a restaurant franchise where you are hoping to drive 10-20% annual returns on your investment.  This is basically a more hands-on alternative to investing in the stock market or other more traditional investment vehicles.  It may or may not require an investor partner, like a family office, that is also looking for current recurring cashflow.  This path is preferred if you need current cash and are not planning to reinvest annual profits into the future growth of the business, as you were doing in the first category.

3.  You Are Creating a Family Legacy

In this category, there is simply one goal: owning and operating a family run business that you can hand off to future generations.  It could come in the form of either of the first two categories above, with one primary difference:  you would not want to take any outside investors, as they will require an exit strategy down the road, and may require you to sell the company to achieve that goal, which defeats of the whole purpose of ending up with a business you can hand off to your family members.  The other major difference here is now there may be multiple opinions around the family dinner table in terms of what types of business they would enjoy operating.  So be sure to toss around those mutually acceptable ideas as a group, before you get started, so there are high odds the next generation will enjoy working in the business and will want to take it over when the older generation retires.

4.   You Need Passive Income   

Another type of business you can buy is one that comes with very little work required by buyers in terms of operating the company.  Businesses that basically “run themselves”.  This could be things like buying a parking garage, or a business that places vending machines in retail locations, or a business that comes with a general manager that will be doing the majority of the work.  So, as you are assessing which business to buy, figure out how much time you want to personally be investing in it, as there is a wide range from 5 hours a week to 50+ hours a week, depending on which business you end up buying.

5.  You Simply Need a Job

This last category is one of necessity. Sometimes people have a hard time getting hired into a job and they need a salary with which to live.   Oftentimes their solution to that is buying a company that is large enough to afford them a salary or other annual distributions that can cover the costs of lliving.  It may or may not involve having investor partners, depending on the size of the company.  But if you take on investors, just remember, you may be looking for another business to buy in 5-10 years, after your investors require you to sell the business to enable their exit down the road. If you don’t want that risk, don’t take on new investors.

Closing Thoughts

So, as we have discussed, there are many different reasons for buying a business. Make sure you are 100% clear on the reasons you are buying a business, and incorporate the learnings above during your evaluation process, to prevent you from getting into a situation that you did not fully understand the consequences when you started.  Good luck and happy hunting!

For future posts, please follow me on Twitter at: @georgedeeb.

Why Sharing the CEO Title Usually Doesn't Work

 

Oftentimes, two co-founders think it is a good idea to share CEO responsibilities as co-CEOs. The logic is that they can separate their roles and responsibilities, with one person leading certain departments (e.g., sales and marketing) and the other person leading other departments (e.g., technology and operations). The reality is, this is a pretty bad idea.  The business should only have one leader at a time who can "lead the ship" and make sure everything is perfectly coordinated across the entire company. This article will teach you the potential pitfalls of a co-CEO strategy.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.