Client HdL Companies
Clients of HdL Companies may have noted an extra spring in the firm’s step recently, as it seems to have been expanding its offices, services and staffing at a steady clip. A West Coast professional group helping local governments maximize revenues through compliance audits, analytical services and software products, HdL has in the past few years established a new HQ in Brea, California, expanded operations to Texas, added cannabis consulting to help local governments manage legalization, and continued to make significant new acquisitions.
Amid this impressive growth, many acquainted with the company may not realize that it has also been heavily engaged in the process of managing an ownership transition – migrating from visionary founders to the next generation of leadership under a new albeit home-grown CEO and senior team.
If handled badly, ownership transition in an early midsized firm can throw up a major set of hurdles and risks. Even if bold choices and a solid new leadership team are selected, challenges will have to be faced, and HdL’s own journey has not been without its hiccups and strains. But it is ultimately the combination of leadership, strategy and teamwork that can set the path for a next phase of growth. Getting this mix right is what has positioned HdL so well for its continuing success.
Embracing Transition. Founded in 1983 by Robert Hinderliter, and joined by co-owner Lloyd de Llamas in 1987, HdL, now has 96 employees in five offices in California and Texas (with three new states coming online soon). Early on, the founders recognized the major ownership challenge facing U.S. businesses, as according to some estimates up to 70% of the owners of small and midsized firms will retire within the next 20 years. This means that the ownership and control of some $10 trillion in assets will change hands, yet the majority of firms do not have ownership transition plans in place.
Hinderliter and de Llamas understood that a planned exit pathway was the best strategy to provide a positive retirement for them while also protecting the current employees and ensuring a platform for the future growth of the company they put so much effort into creating. Rather than selling to an outside concern, they opted for an Employee Stock Ownership Plan (ESOP). They mapped out a timeline for transitioning ownership to the employees, while identifying and mentoring a new leadership team combining inside and external talent.
It was a daunting task, with a number of key requirements. They had to find a next generation of leaders and owners in which they could have confidence. They had to win the buy-in of this new group to believe that they could really invest their lives into the business, including finding a way to fund the buyout. And the founders understood that, at the right time, they truly had to hand over the reins of leadership and allow the new team to get on with it.
As the example of HdL shows, a handover can be broken down into three main phases, each critical and with its own risks:
- Mapping the Transition. A successful transition involves building a culture of ownership among the new leaders, and fully delegating all the tasks and responsibilities that owning a business entails.
- Selecting the Leadership. The next CEO should be selected based on their true potential to be a great leader for the company. Many founders, failing to make hard a choice, opt for the emotional favorite, even if he or she does not have the full skill set.
- Consolidating the New Team. The ideal leader will naturally develop followers and should make excellent decisions. But this is also the chance to update the management structure and draw in fresh expertise as well as outside advice and support to establish a fresh culture.
Making Succession Work. So, how did HdL’s leadership handle their transition? While managing the corporate changes, the company continued to expand impressively, moving to new headquarters to accommodate growth, adding its first out-of-state expansion into Texas with the purchase of Houston-based Sales Tax Assurance, and incorporating fresh services, including the new field of cannabis consulting. By the end of 2017, a decade since starting the transition, HdL had tripled its top line.
The key to this growth has been a series of excellent strategic decisions.
The first good choice was the new leadership. In 2010, the owners appointed Andrew Nickerson as President and CEO. Nickerson had joined the company in 1992 and had held a succession of roles with increasing responsibility, rising to vice president.
“When I was appointed with a new management team, employees already owned 33 percent of the firm, so the transition was unmistakably under way,” Nickerson remembers. “The completion of the ESOP buyout from the founders within two years made it clear that the future was ours to create, and it was very exciting.”
By mid-2013, Nickerson’s stewardship at HdL had borne fruit. Three long-time leaders had solidified around his leadership. The company had already paid off its note for buying one-third of the shares. And revenues were up.
The second important decision was to develop new business. With the approval of the founders, Nickerson and his team undertook growing the company to the next level. That made some of the older ESOP participants nervous that their ownership might be put at risk.
As CFO Jeff Schmehr, who joined HdL in 2005, recalls, “When we became a 100% ESOP, our near-retirement-aged employees lobbied hard for an ultra-conservative growth strategy. We wanted to minimize the risks, but we knew our employees were better served by supporting both the core business and developing new growth areas. Now I receive phone calls from these retirees congratulating our team on a job well done.”
The third key departure was to expand the senior management. With strong opportunities beckoning, the company required more leadership bandwidth. So, in 2013-15, Nickerson hired five more senior management leaders. The Board developed too, with three new outside members joining in 2016-18.
Consolidating the Change. It was not all smooth sailing, however. The company was correct in recognizing the need to change. But each new initiative brought fresh requirements, and all this change brought sharp challenges and “pain points” – strains in the system represented by inefficiencies, lack of clarity, skills gaps and risk. Moving from the founders to a new and expanded leadership team, opening new offices and taking on new product lines highlighted the need for a more disciplined management practice. The team recognized that this was vital to keeping the transition on track.
A fourth key decision, then, was to focus on management consolidation and growth planning. This was not just a general idea but rather an active choice to invest meaningful time, energy and resources into the effort, including bringing in outside help.
In spring 2016, Nickerson and Schmehr reached out to Robert Sher of CEO to CEO, the expert San Francisco-based consulting group specifically oriented to midsized firms such as HdL. This immediately gave them access to a wealth of top executive expertise. While the HdL leadership team had their hands full running the company, Sher and his colleagues were able to focus exclusively on the needs of the HdL senior management and on practical steps to ensure that agreed improvements actually took place.
At a delicate moment in the transition, the leadership especially appreciated the objectivity of the advice Sher was able to provide.
“Within the company, there was a progressive, change side, and there was a kind of status quo side. We realized that a new director would become the deciding factor,” recalls Schmehr. Nickerson and Schmehr attended a seminar hosted by Sher, and they liked what they saw. “So, the next thing we know,” Schmehr continues, “we are turning to CEO to CEO in several areas, helping us through the changes, and especially helping Andy [Nickerson] find creative ways to deal with the issue of balance on the Board.”
One of the first innovations was to develop a One Page Business Plan, bringing clarity and accountability to key corporate objectives. The leadership committed to meet monthly to review progress and encourage bonding within the group. Communication and teamwork increased immediately, deepened by a two-day workshop on team cohesion.
“As part of that trust building, we were encouraged to share something personal about ourselves,” says Schmehr. “I think even Rob [Sher] was amazed at the kind of personal information that came out during those moments. It showed everyone that there was in fact a high-level inherent trust within the room.”
This bonding effort was combined with ongoing business coaching, for Nickerson and other key members of the leadership, provided by Sher and Megan Patton, another CEO to CEO principal. Being a CEO can be lonely, and this process helped Nickerson think through the challenges and come up with fresh solutions.
“We were well into the transition by then, and were all feeling a lot of pressure to perform,” says Nickerson. “But some of the things we were facing where out of our wheelhouse. Rob [Sher] was able to draw on a huge breadth of corporate experience to help us find fresh ideas and new solutions. It was absolutely crucial.”
These discussions helped the team acknowledge that the new areas of business demanded new expertise they did not have in-house. While the out-of-state acquisition in Texas, HdL’s first, needed to be bedded down, the team was impatient to acquire more. Glenn Fishler, another CEO to CEO principal, coached the team through a planning process, so that all further acquisitions would be strategic and well planned.
The CEO to CEO team also provided advice on the particular challenges of a start-up venture, which was effectively the case with the new cannabis consultancy. HdL proved to be expert at the work itself. But unlike in the sales tax auditing field, where the firm is a recognized leader, they did not appreciate the essential need for aggressive marketing when moving into a new area.
“We had this nice dinner table all ready and set for California’s local governments, but the word wasn’t getting out to everyone,” says CFO Schmehr. “Basically, we were sitting back and taking clients as they came, and Rob [Sher] said, ‘Yeah, you’re not going to grab market leadership that way. You’ve got to get out there.’ He was instrumental in making sure that marketing for the new area was not under-resourced or under-appreciated, otherwise we would have missed the window of opportunity.”
The consolidation process also focused on Board transition, as it needed to move from an internal and founder-controlled body to a more professionalized strategic entity. This dialogue led to a successful mapping out of the additional skills required, recruitment of three new members, and training on new roles and responsibilities, so that the Board could work collaboratively with management.
Tying all these efforts together, the HdL leadership launched a process to develop a new long-term vision. To kick off the exercise, the CEO to CEO team organized another two-day offsite workshop to share approaches on how to develop, consolidate and drive a fresh vision. Once approved by the Board, the resulting strategy will guide the company’s future over the coming decade and ensure that the workforce at all levels is pulling together.
Be Strategic about Succession. Ownership succession planning requires a strategic approach that starts several years before the transition moment. Founders must be thoughtful and realistic. Then they must move steadily to transition the business for a new future. The new owners also have to be strategic, mapping out their plans while recognizing and taking steps to fill their weaknesses and gaps – whether through additional senior managers, fresh Board members or expert external support like CEO to CEO.
As Nickerson says, “From a macro-perspective, taking 10 years to change our company into a team-led growth machine seems slow. On the other hand, it felt like each year at some level our culture and leadership changed. We took it slowly, one step at a time, even though we were eager to arrive where we are today. In the end, we have preserved the best of what our founders, Robert and Lloyd, created along with new energy and high expectations.”
Robert Sher is founding principal of CEO to CEO, a consulting firm of former chief executives that improves the leadership infrastructure of midsized companies seeking to accelerate their performance. He was chief executive of Bentley Publishing Group from 1984 to 2006 and steered the firm to become a leading player in its industry (decorative art publishing).