Ritual Questions Help Inform Effective Leaders

Eric J. McNulty

Eric J. McNulty is the director of research at the National Preparedness Leadership Initiative and writes frequently about leadership and resilience.

High-impact leaders are insatiably curious — about themselves, the people who work for and with them, and the world in which they operate and beyond. Inquisitive leaders are effective because building knowledge and wisdom are essential to professional success.
Naturally curious people ask lots of questions and take time to reflect on the answers. Even if you aren’t naturally curious, you can build this type of reflection into both your agenda and the agendas of your employees by asking so-called ritual questions (example: “What have I learned today?”). Although ritual questions are not widely used in organizational settings, they can be a simple tool for improving your leadership skills and style.

Ritual questions give your brain time to process the torrent of data you encounter every day. According to Colonel Eric Kail, the former course director of military leadership at the U.S. Military Academy at West Point, this reflection “is an effort to understand how the events of our life shape the way in which we see the world, ourselves, and others.”

Taking time to reflect can feel uncomfortable, but once you push past the fear of not being busy and realize the benefits of a deeper level of thinking, you can linger longer on these questions. Even taking time out for as little as 10 minutes of quiet thought each day can help you tap into the vast stores of information buried in your subconscious and open yourself to sometimes surprising insights. Using ritual questions such as “When was I at my best today? When was I at my worst?” can help both prompt and guide your thinking.

Ritual questions such as “When was I at my best today? When was I at my worst?” can help guide your thinking.

And although high-powered analytics can generate reams of data, it is easy to fall prey to chasing the usual generic-query suspects, such as conversion rates or viewership rankings, and overlooking anomalies that can provoke deeper inquiry. Instead, a ritual question such as “What do we know today that we didn’t know yesterday?” will push you to probe more intensely. After all, “nothing” is not a satisfying answer — and it likely isn’t accurate, either.

True leaders build capacity and capability in people for tackling tomorrow’s challenges while meeting today’s goals; it is a matter of cultivating performance rather than simply extracting value. Answering ritual questions will help build the self-awareness necessary for growth in both you and your team.

Here are four ritual questions that I have found most useful for leaders to ask themselves:

• “What encounter did I handle particularly well today and why?”
• “What encounter do I believe the other person in the exchange thinks I handled well and why?”
• “What encounter did I handle poorly today and why?”
• “What encounter do I believe the other person in the exchange thinks I handled poorly and why?”

By exploring both positive and negative experiences from multiple perspectives, you develop a more nuanced and dimensional understanding of your strengths, weaknesses, motivations, and fears. Such exploration will also help you navigate the constant pull between being who you are as a leader and who others need you to be.

And while ritual questions are asked regularly, they are not cookie-cutter. Answering them must require thoughtful consideration. The best ritual questions are open-ended in order to promote contemplation and discovery. “How are we progressing against the sales goal?” may be regularly asked, but it does not rise to the level of a ritual question any more than “How’s the weather?”

If daily practice is too much for you, try setting aside time for asking weekly ritual questions — doing it any less frequently will make it harder to detect recurring themes and engage in timely follow-up. If, however, you have standing biweekly or monthly meetings that can’t be made more frequent, weave ritual questions into these, and carve out some time in the meeting intervals to check in with yourself. The important thing is to establish the discipline and experience the benefits.

Integrating ritual questions into team meetings and one-on-one meetings with your direct reports can help everyone become more self-aware and grow.

One-on-one ritual questions inform performance management and alleviate the pain of a once-a-year assessment. Include questions such as “What have you accomplished since we last met?” “What’s challenging you?” and “How can I best help you meet that challenge?” in each meeting. When well-documented, the answers comprise a record of achievement and a roadmap for development. These particular questions frame your relationship as one where success is celebrated and obstacles are openly discussed. It gives you the opportunity to intervene early where necessary and provide needed ideas or other resources. As you continue to ask these questions over time, their ritual nature encourages your subordinates to reflect in preparation for meeting with you.

With your team, ask group-oriented versions of these questions, such as “What can we learn from a collaborative success from the past week?” or “What obstacle can we only overcome together?” These not only spur conversation but emphasize why you are meeting, and working, as a team.

Don’t relegate your leadership development to periodic courses or workshops (as useful as those can be). Expanding your capacity and capability as a leader is an ongoing endeavor. Using ritual questions will create frequent opportunities to hone your skills, deepen your understanding, and increase your impact.

How to Tackle Your Toughest Decisions

• Joseph L. Badaracco

Every manager makes tough calls—it comes with the job. And the toughest calls come in the gray areas—situations where you and your team have worked hard to gather the facts and done the best analysis you can, but you still don’t know what to do. It’s easy to become paralyzed in the face of such challenges. Yet as a leader, you have to make a decision and move forward. Your judgment becomes critical.

Judgment is hard to define. It is a fusion of your thinking, feelings, experience, imagination, and character. But five practical questions can improve your odds of making sound judgments, even when the data is incomplete or unclear, opinions are divided, and the answers are far from obvious.

Where do these questions come from? Over many centuries and across many cultures, they have emerged as men and women with serious responsibilities have struggled with difficult problems. They express the insights of the most penetrating minds and compassionate spirits of human history. I have relied on them for years, in teaching MBA candidates and counseling executives, and I believe that they can help you, your team, and your organization navigate the grayest of gray areas.

This article explains the five questions and illustrates them with a disguised case study involving a manager who must decide what to do about a persistently underperforming employee who has failed to respond to suggestions for improvement. He deserves a bad review, if not dismissal, but higher-ups at the company want to overlook his failings.

How should the manager approach this situation? Not by following her gut instinct. Not by simply falling into line. Instead, she needs to systematically work through the five questions:
What are the net, net consequences of all my options? What are my core obligations? What will work in the world as it is? Who are we? What can I live with?

To grapple with these questions, you must rely on the best information and expertise available. But in the end you have to answer them for yourself. With gray-area decisions, you can never be certain you’ve made the right call. But if you follow this process, you’ll know that you worked on the problem in the right way—not just as a good manager but as a thoughtful human being. 

Net, Net Consequences
The first question asks you to thoroughly and analytically consider every course of action available to you, along with the full, real-world, human consequences of each. Gray-area problems are rarely resolved in a flash of intuitive brilliance from one person; as a very successful CEO told me, “The lonely leader on Olympus is really a bad model.” So your job is to put aside your initial assumption about what you should do, gather a group of trusted advisers and experts, and ask yourself and them, “What could we do? And who will be hurt or helped, short-term and long-term, by each option?”

Don’t confuse this with cost-benefit analysis, or focus solely on what you can count or price. Of course, you should get the best data you can and apply the relevant frameworks. But gray-area problems require you to think more broadly, deeply, concretely, imaginatively, and objectively about the full impact of your choices. In the words of the ancient Chinese philosopher Mozi, “It is the business of the benevolent man to seek to promote what is beneficial to the world and to eliminate what is harmful.”

In today’s complex, fluid, interdependent world, none of us can predict the future with total accuracy. And it’s sometimes hard to think clearly about gray-area issues. What’s important is taking the time to open your mind, assemble the right team, and analyze your options through a humanist lens. You might sketch out a rough decision tree, listing all potential moves and all probable outcomes, or designate certain people to act as devil’s advocates to find holes in your thinking and prevent you from rushing to conclusions or succumbing to groupthink.

It’s sometimes hard to think about gray-area issues.

When you make important, difficult decisions, you affect many people’s lives and livelihoods. The first question asks you to grapple hard with that reality.

Core Obligations

We all have duties—as parents, children, citizens, employees. Managers also have duties to shareholders and other stakeholders. But the second question gets at something deeper: the duties we have to safeguard and respect the lives, rights, and dignity of our fellow men and women.

All the world’s great religions—Islam, Judaism, Hinduism, Christianity—emphasize this obligation. The contemporary ethicist Kwame Anthony Appiah has said, “No local loyalty can ever justify forgetting that each human being has responsibilities to every other.”

How can you figure out specifically what these duties oblige you to do in a particular situation? By relying on what philosophers call your “moral imagination.” That involves stepping out of your comfort zone, recognizing your biases and blind spots, and putting yourself in the shoes of all key stakeholders, especially the most vulnerable ones. How would you feel in their place? What would you be most concerned about or afraid of? How would you want to be treated? What would you see as fair? What rights would you believe you had? What would you consider to be hateful? You might speak directly to the people who will be affected by your decision, or ask a member of your team to role-play the outsider or victim as persuasively as he or she can.

Again, you must look past economics and your business school training. Yes, managers have a legal duty to serve the corporation—but that’s a very broad mandate that includes the well-being of workers, customers, and the community in which they operate. You have serious obligations to everyone simply because you are a human being. When you face a gray-area decision, you have to think—long, hard, and personally—about which of these duties stands at the head of the line.

The World as It Is

The third question pushes you to look at your problem in a clear-eyed, pragmatic way—seeing the world not as you would like it to be but as it is. Ultimately you need a plan that will work—one that will move an individual, a team, a department, or an entire organization through a gray area responsibly and successfully.

The phrase “the world as it is” points toward Niccolò Machiavelli’s thinking—a perspective that might seem surprising in an article about making responsible decisions. But his view is important, because it acknowledges that we don’t live in a predictable, calm environment populated with virtuous people. The world Machiavelli described is unpredictable, difficult, and shaped by self-interest. Sound plans can turn out badly, and bad plans sometimes work. Much of what happens is simply beyond our control. Leaders rarely have unlimited freedom and resources, so they must often make painful choices. And a great many individuals and groups will pursue their own agendas, skillfully or clumsily, if not persuaded to do otherwise.
That is why, after considering consequences and duties, you need to think about practicalities: Of the possible solutions to your problem, which is most likely to work? Which is most resilient? And how resilient and flexible are you?

To answer those questions, you need to map the force field of power around you: who wants what and how hard and successfully each person can fight for his aims. You must also ready yourself to be agile and even opportunistic—maneuvering around any roadblocks or surprises—and, when the situation calls for it, to play hardball, asserting your authority and reminding others who is the boss.

It’s easy to misinterpret the third question as an “out”—an excuse to do what’s safe and expedient instead of the right thing. But the question is really about what will work if you bring persistence, dedication, creativity, prudent risk-taking, and political savvy to the task.

Who Are We?

According to an old African adage, “I am because we are.” Put differently, our behavior and identities are shaped by the groups in which we work and live. As Aristotle said (and as a vast body of scientific literature has since confirmed), “Man is by nature a social animal.” So this question asks you to step back and think about your decision in terms of relationships, values, and norms. What really matters to your team, company, community, culture? How can you act in a way that reflects and expresses those belief systems? If they conflict, which should take precedence?

To answer those questions, you might think about the defining stories of a particular group—the decisions and incidents that everyone cites when explaining the ideals to which you are collectively committed, what you have struggled to achieve, and what outcomes you try hard to avoid. Imagine that you are writing a sentence or a chapter in your company’s history. Of all the paths you might choose in this gray area, which would best express what your organization stands for?

This question comes fourth because you shouldn’t start with it. Unlike the first three, which require you to take an outsider’s perspective on your situation and consider it as objectively as possible, this one addresses you as an insider, at risk for adopting an insular, limited view when you consider norms and values, because we are naturally inclined to take care of our own. So counterbalance that tendency with the thinking prompted by the previous questions.

Living with Your Decision

Good judgment relies on two things: One is the best possible understanding and analysis of the situation. The other involves the values, ideals, vulnerabilities, and experiences of whoever will be making the decision. A seasoned executive once told me, “I wouldn’t go ahead with something just because my brain told me it was the right thing to do. I also had to feel it. If I didn’t, I had to get my brain and my gut into harmony.”

Ultimately you must choose, commit to, act on, and live with the consequences of your choice. So it must also reflect what you really care about as a manager and a human being. After considering outcomes, duties, practicalities, and values, you must decide what matters most and what matters less. This has always been the challenge of taking on any serious responsibilities at work and in life.

How will you figure out what you can live with? End your conversations with others, close the door, mute the electronics, and stop to reflect. Imagine yourself explaining your decision to a close friend or a mentor—someone you trust and respect deeply. Would you feel comfortable? How would that person react? It may also be helpful to write down your decision and your reasons for it: Writing forces clearer thinking and serves as a form of personal commitment.

In Practice

Now let’s turn to our case study. Becky Friedman was the 27-year-old manager of a 14-person technology group responsible for clothing sales at an online retailer. One of her team members, Terry Fletcher, a man 15 years her senior with a longer tenure at the company, wasn’t doing his part. Although his previous boss had routinely given him scores of 3.5 on their five-point performance scale, Friedman didn’t believe his work merited that; and whenever she presented him with opportunities to develop his skills and ramp up his contributions, he failed to follow through. So she wanted to drop his rating to 2.5 and put him on a performance improvement plan (PIP), on a path to dismissal. Soon, however, two of the company’s vice presidents, good friends of Fletcher’s, caught wind of her plans and paid her a visit. They asked whether she was sure about what she was doing and suggested that the real problem might be her management.

Suddenly the situation was no longer black-and-white. Friedman had entered a gray area and felt stuck. To find a way out, she turned to the five questions. She considered her options—stick to her plan, abandon it, or find a middle ground—and their consequences. She reminded herself of her basic duties to her fellow human beings, including Fletcher, her team, and the VPs. She evaluated the practical realities of her organization. She weighed the defining norms and values of her various social groups. And she thought carefully about her own abiding sense of what really matters in life.

She suspected that if she pushed forward and gave Fletcher the rating he deserved, she and her team would suffer retribution: The VPs could withhold resources or even force her out of the company. She also worried about Fletcher, who seemed off-balance and appeared to have few things going well in his life. How would a poor review and a possible job loss affect him, not just financially but also psychologically? If Friedman chose option B, however, she would still have a deadweight on her team, which might prevent the group from achieving its ambitious goals and demoralize its most talented and diligent members. The VPs might also take her capitulation as a sign of weakness, which could keep her, a relative newcomer, from moving up in the leadership ranks.

Would you feel comfortable explaining your decision to a close friend?

Middle-ground options, such as presenting Fletcher with further development opportunities or giving him another warning, seemed more promising but carried their own risks: Would they be effective in changing his behavior? Would they still result in backlash from the VPs? Friedman also thought about what she, her team, and her organization cared about most. As a woman in computer science, she knew what it was like to be marginalized, as Fletcher was among the whiz kids in her department, and she felt compelled to help him. At the same time, her group prided itself on exceptionally professional performance, and her company, although young, had always claimed and generally proved to be a meritocracy with high standards and a sharp focus on customer needs.

After much deliberation, Friedman decided to try a counseling session with Fletcher. She opened by telling him that she had decided to give him a 2.5, but that she wouldn’t put him on a PIP because it would be too demeaning. She then asked him to consider the department’s recent hires—all of whom had strong technical skills—and honestly evaluate whether he would be happy or successful working alongside them. She concluded by suggesting that he spend the next several months continuing to do his job while also looking for another one. She was surprised and relieved when his immediate anger over the bad rating subsided and he agreed to consider her plan; in fact, he had already been toying with the idea of leaving. He spent the next several weeks looking for other positions, inside the company and elsewhere, and soon joined another company. Friedman, meanwhile, continued to thrive. She had, of course, been lucky; there was no guarantee that Fletcher would respond so positively to her feedback. But she’d put herself in a good position by getting the process right, and she’d been prepared to try other, equally thought-through tactics if the first didn’t work.

When you face a gray-area problem, be sure to systematically answer all five of the questions, just as Becky Friedman did. Don’t simply pick your favorite. Each question is an important voice in the centuries-long conversation about what counts as a sound decision regarding a hard problem with high stakes for other people.

Leadership can be a heavy burden. It is also a compelling, crucial challenge. In gray areas, your job isn’t finding solutions; it’s creating them, relying on your judgment. As an executive I greatly respect once told me, “We really want someone or some rule to tell us what to do. But sometimes there isn’t one, and you have to decide what the most relevant rules or principles are in this particular case. You can’t escape that responsibility.”

A version of this article appeared in the September 2016 issue (pp.104–107) of Harvard Business Review.

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Joseph L. Badaracco is the John Shad Professor of Business Ethics at Harvard Business School, where he has taught courses on leadership, strategy, corporate responsibility, and management. His books on these subjects include New York Times bestseller Leading Quietly, Defining Moments, and his latest book, Managing in the Gray (HBR Press, 2016).

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How can I grow my company when I'm too busy to spend time on strategy?

Brian Brennan

Special to The Globe and Mail

THE QUESTION

I am way too busy to do anything more than what I am already doing. If I take my eye off the ball things will far apart quickly. How can I grow my business? I don’t have time to.

THE ANSWER

You have a product or service that is proving to be valuable in the market. People want it and now you can think about how to deliver it to even more customers.

I’m going to assume that you did not get into this business just to create a job for yourself and that you really want to see your business grow.

With that in mind, it is time to shed the activities that are not what you do best. Doing that will give you an opportunity to grow the business and bring in people who can most help you.

Which activities can be done better by someone else?

The first thing you need to do is to look at activities you are performing that do not add value to the company or that can be done better by someone else. They are likely chewing up more of your time than they should.

I would use some sort of a journal. Just jot down the significant activities that you perform so that you can review them later. It is likely that some of the work you identify can be done better by someone else in less time.

If you are great at selling, then you should consider giving up accounting and leave it to an expert. Maybe production is your specialty and getting in front of customers is difficult for you. It’s probably time to hire someone who specializes in sales to help you grow the business. The situation is different for everyone.

What is important is that you take some time to consider what you are good at and provide the most value and begin to hire people full-time or bring them in on contracts to take over some of the other activities. Drop any activities that have no current purpose – immediately.

But I can't afford to hire more staff!

Instinctively, you will have some objections to this advice:

· You cannot afford to pay someone to perform these other activities

· Some activities require unique knowledge that only you have. Therefore, training a new person will be next to impossible. It will take up too much of your time.

· You don’t have time to keep such a journal and review it.

There is no way to avoid spending time analyzing where you can apply your limited resources to improve your business. To start, you need to take a leap of faith. Spending time analyzing your challenges and training needs is a priority. You will discover that your investment of time will have a huge payback in the future.

Training is often overlooked by business owners because of their busy schedules. It is no secret that the most successful organizations take the time to train their employees well.

Having money to hire is always a challenge for a growing business. The good news is that if you bring in the right people your investment will pay off quickly. Most business owners will keep costs low for the first few people they hire. But if they are the right employeese you will see immediate positive results. I think that hiring people when the need is clear to you is a good practice.

It is important to understand exactly what you want to achieve by hiring people before you begin any recruiting activities. I like to develop a list of accomplishments that I expect from a new hire if they are performing their job well. The more specific you are about what you expect the more likely you will hire the right people for your organization.

It is also important not to rush even though you will feel like you have to.

You need to understand that it takes time to save time. Your success is not accidental. It requires you to think ahead and execute carefully according to your needs and instincts. Ironically, taking the time you need to make these important decisions will ultimately be one of the most significant contributors of success to you and your company.

Brian Brennan is a senior partner at MAX Potential, an organization committed to assisting clients with the successful growth of their businesses. He actively coaches small and medium size business owners in all aspects of their growing companies.

How can I attract top talent when my company can’t pay big salaries?

BRIAN BRENNAN

Special to The Globe and Mail

THE QUESTION

I need to hire good people, but we are too small to pay the salaries that experienced people are asking from us. How can I attract good people without paying them too much?

THE ANSWER

Small-business owners often feel at a disadvantage because many of the larger companies can pay employees more than they can. There is more to employment than money, though.

Not everyone likes working for large companies for their entire career. They provide great training and experience, but they often lack the “feel” that small companies have. That is worth something to people and that is why you can attract good people to your organization without having to pay more than you can afford. It is your secret weapon.

In my experience, people don’t work just for money. Often the culture, the meaningfulness of their contribution, and the ability to grow personally and professionally weigh large in their decision on where to work.

If you want to win the employment game, you need to find ways for your organization to seem attractive to potential employees. Here is my take on some of the things you can do:

Provide things that large companies can’t

People working in large companies often complain about slow decision-making, too much paperwork and a focus on the company and not the customers.

Smaller companies like yours have the advantage of having fewer managerial layers so you can make decisions much more quickly. Decisions are often made on the fly (not that they should always) and because you are close to your customers, you can react to their needs more rapidly than a large company can.

These are great selling points to people. My experience is that they will forgo some salary for these advantages.

Offer fair compensation packages

Just because you are small does not mean that you can pay significantly less than market rates. You need to know the market rates well and make sure that you can explain to employee prospects why the difference in rates exists. You can get away with paying less, but it has to be for good reasons.

Some of the reasons that I have heard about include:

· More fulfilling work

· Great culture in the company

· Flexibility to deal with family and children needs

· Likes where the company seems to be heading – your leadership

· A broad variety of challenges

Create a company culture that interests people you want to attract

There is nothing better than working at a place that puts a smile on your face. Many times my clients have asked how to create a positive culture in their organizations. The answer I often give is that they are the people creating it through their leadership.

If you want a fun environment, provide outlets for people to have fun. Some owners provide games rooms, after-hours “get-togethers” or other activities that employees are interested in.

If you want open communication, have regular communications with employees individually and as a group. Talk about things that are important to them and that contribute to the success of your company.

Finding the right people

Chances are that when you need someone in a hurry, you won’t find them very easily. That is why you always have to be looking and ready to hire when the right person shows up.

Networking is probably the most effective tool you have. It gives you and prospective employees the opportunity to develop a relationship where you get to know how each other thinks, acts, etc. That is an important part of the interview process.

Unfortunately, most business owners neglect networking because they feel that they are too busy running the business to spend time on it. I think that this is a critical activity that needs to be given priority.

When people find a “fit” that they like with you and the company, their salary will not be their top priority and you will be able to continue to invest in the growth of your business.

I’ve always interviewed good people even when I didn’t need to hire them. Sometimes you may find a place for a perfect person and other times you will benefit from developing a bank of great contacts whom you may hire later when they are available and you are ready. Those have often been my most successful hires.

Brian Brennan is a senior partner at MAX Potential, an organization committed to assisting clients with the successful growth of their businesses. He actively coaches small and medium-sized business owners in all aspects of their growing companies. He is also chair of TEC Canada.

It doesn't make sense to hire smart people....

Personality vs attitude

Getting your business ready to sell

 

  

  Ted Maduri    

 

 

    Andrew Lord 

Selling your business is a lot like selling your house: it should have “curb appeal” and pass a buyer’s “home inspection” with flying colours. In this article, we will look at some of the steps that you, as an owner-manager or officer/director of a mid-sized company, can take to get your business ready to sell.

At the end of the article, we summarize tips to consider in your day-to-day operations and when selling becomes likely
.
Objectives and Planning: What do you want to do and when?
Objectives will vary from sale to sale, but they usually include some combination of business, personal and tax objectives. Business objectives may include spinning off a line of business or involving a partner with “deep pockets” to take the company to the next level. Personal objectives may include freeing up the money in your business so that you can retire, or to get out of the business because you no longer enjoy or are capable of running it. Tax objectives may include ensuring that the sale fits your estate plan.

If you are thinking of selling your business, allow plenty of lead time to ensure it is in the best possible shape prior to being put on the market. Preparing for and executing a sale can take as much as two years from start to finish, especially if there are multiple suitors in an auction situation. The actual sale process, including negotiating with the preferred buyer and closing the deal, often takes up to half of that time, if things go smoothly, or longer, if you are not prepared or if the buyer identifies material issues when conducting its due diligence. The more preparation you do beforehand, the more quickly and smoothly the sale is likely to go.

Sale Process: Are you prepared to take all of the steps between now and closing?
Selling a business is a very involved process that will require a significant amount of time and attention from individuals, directors and shareholders. You should “project manage” the process, either by yourself or with the help of an advisor or advisors, to ensure that distraction is minimized, all stakeholders are working together and that the sale is completed in a timely manner in accordance with your financial and other objectives. Sellers generally benefit from a relatively speedy transaction, particularly where they would prefer to keep the sale confidential from competitors and employees until the deal is imminent or complete.

From testing the waters before you put your business on the market through to tying up loose ends once your business is sold, there are many steps to complete the sale of any business. We have outlined some typical steps in the sales process as an attachment to this article. These steps may vary depending on how you sell your business (e.g., by way of an asset sale versus a share sale) and to whom. However, in all cases, advanced preparation can make the entire process easier. In this article, we point out ways to make the sale process easier and more effective not only on the eve of the transaction, but also in the months and years of normal operation that precede a sale.

Value: What is your business worth?
It is trite to say but it is a manager’s and director’s duty (and a shareholder’s desire) to get the best price possible for the company. While it is not as simple to get comparable prices for your company as it is when selling a home, there are sources worth exploring to get a sense of deals done (and prices paid) in your company’s industry. Typically, different industries have different valuation multiples or conventions (such as one times revenue or 3-4 times EBITDA). At the end of the day, your management team and other key employees, intellectual property, goodwill, customer lists, and earning capacity are likely your most valuable assets. However, buyers may value these core assets differently: a financial buyer may put more value on the current management team than will an industry buyer that has its own management team in place already. Consider having a charted business valuators (a specialized designation some chartered accountants attain), corporate finance advisor or an accountant (with the appropriate expertise) appraise your business so you can set a realistic price target.

In negotiating the purchase price, both parties should spend nearly as much time on how and when that purchase price will be paid as they do on the dollar value itself. Will the entire purchase price be paid at closing? Will there be a hold-back or an earn-out? Will there be a loan from the seller (also known as a vendor-take back)? For what term? At what interest rate? With what security? Structuring the payment of the purchase price can be an extremely important element of the deal and professional assistance can be invaluable.

Team of Advisors: Whose help do you need?
The issues that arise on a sale are typically so numerous and complex that it would be foolish to negotiate and close the transaction on your own. Early in the sale process, you should determine which professional advisors you need to retain. In our experience, at a minimum you will be engaging lawyers and accountants with transaction experience. An experienced lawyer will not only ensure that all legal requirements are met, but will also know what terms and conditions in the purchase agreement and other documents are “market” for your type of deal. Accountants will help ensure that your financial picture is clear and current and can help you work through the financial implications of tax and other structuring issues that may arise.

You may also choose to retain business valuators to help you set an appropriate purchase price (as discussed above). If several suitors may be interested in your business, M&A advisors or investment bankers can help identify prospective buyers (discussed in greater detail below) and market your business to them. M&A advisors can draft compelling information/marketing documents about the company and realistic terms sheets, coordinate the flow of information to and from buyers (particularly in an auction process) and run financial analysis of sale scenarios. M&A advisors can also undertake negotiations on behalf of the owner, which creates some emotional distance between the owner and the prospective buyers. It also allows the owner to continue focusing on running the business at the highest level to ensure that there are no dips in financial or operational performance that could scare off buyers or compromise the owner’s negotiating position.

Sellers should take care to retain advisors who have appropriate experience with similar deals (i.e., similar size, complexity, industry, type of buyer, etc.). If you have a trusted relationship with one of these types of advisors, consider asking him/her for referrals to other potential members of your deal team. Sellers should also budget for the costs of these advisors at an early stage of the transaction so as to obtain a reasonable estimate of the expected take-home proceeds from the sale of the business.

Buyers: Who are the potential buyers of your business?
Potential buyers typically fall into one of two groups: (1) industry buyers (also sometimes referred to as “strategic” buyers); and (2) financial buyers such as private equity funds. You may also come across strategic buyers who have partnered with a private equity house and together they constitute a “hybrid” buyer.

Industry buyers are usually looking to grow their existing businesses by acquiring the product lines, capital assets, intellectual property, people, customers, supply relationships, distribution channels or territory of complementary businesses. Industry buyers may have to contend with a higher cost of capital when funding an acquisition and there may be greater regulatory risks with such a deal.

In contrast, financial buyers typically have access to less expensive capital than industry buyers. They tend to target businesses that will generate a desired level of return within a fixed investment horizon (for example, 5 years). They often look for companies that have solid businesses in place but whose valuation could be boosted by implementing operational efficiencies or by injecting new capital into the business. Given their focus on short- to medium-term returns and their use of leverage, financial buyers will be very exacting in their analysis of the financial performance of your business, both before and after the sale closes.

One of the most valuable contributions M&A advisors make to transactions is to help identify the right potential buyers for a business. These advisors have databases, relationships, knowledge and experience as to who and where the most likely buyers will be found and what their motivations may be for doing a deal.

Once you have identified one or more prospective buyers, you should qualify them as real prospects. Working with your advisors, you should try to confirm that each potential buyer is genuinely interested in acquiring the business, has the expertise and financial wherewithal to close the deal, and has the experience and ability to run the business once they have bought it. You do not want to waste your time pursuing a deal that may never close or disclosing information to parties that are on “fishing expeditions” (who may even be competitors, masquerading as buyers, merely gathering intelligence on your business).

Corporate Structuring: Does your current structure make sense for the deal?
Your company’s corporate structure may be the same as the day it was incorporated or may have evolved in response to changes in the business. While the current structure may have made sense in the past, it may not be optimal for the purposes of selling the business due to a variety of factors that may arise in the sale process. If a sale becomes a possibility, sellers should promptly talk to their advisors and prospective buyers to determine whether the corporation needs to be restructured prior to closing the deal. Significant lead time may be required to obtain the benefits of a restructuring because some of the upside of particular ownership structures can only be accessed after ownership interests have been held for a prescribed period of time.

Several considerations come into play when analyzing the pros and cons of a given corporate structure. While the tax treatment of the various steps of the transaction, including transfers between the buyer and seller and distributions of proceeds from the seller to its shareholders, is one of the key determinants of an optimal structure, other factors may also be relevant. These factors could include applicable regulations, third party consent rights, shareholder approval thresholds and other matters. A particular structure may also help (or hinder) a seller that wants to dispose of only part of its business.

As soon as a deal is on the horizon, you should review all aspects of the structure with your advisors and with prospective buyers. What type of entity is used to carry on the business: a corporation, partnership, limited partnership, sole proprietorship, etc.? How do shareholders hold their respective interests in the business: directly or through holding corporations or trusts? How does the company own its material assets and lines of business: directly or through subsidiaries or affiliates? A structure that is optimal for the sellers may not be optimal for the buyers, and vice versa. Any potential restructuring may therefore become a significant point of negotiation between the parties. From the sellers’ perspective, it is likely easier to implement a preferred structure long before a sale is imminent and then put the buyers in the position of having to negotiate changes to your structure once a deal is on the table.

If you determine that a different structure would be better suited to the deal, then you may have to plan a reorganization prior to or as part of the closing. Such reorganizations will add cost and complexity to the transaction, may introduce additional approval requirements (such as shareholder approval of fundamental changes), and could extend the time required to close the deal.

“Seller Due Diligence”: Do you have the answers to all of the questions buyers might ask?

As mentioned above, due diligence is essentially the “home inspection” of your business. You want to ensure that there are no surprises for the buyer that were not disclosed appropriately.

Due diligence usually occurs in three ways: (1) document-based due diligence (i.e., looking at your corporate records and contracts); (2) a site visit where the buyer inspects key assets, such as facilities, equipment and inventory, in person; and (3) management and advisor interviews to clarify and confirm the information gathered from the document review or site visit and to add colour to other due diligence findings. Following due diligence, the buyer’s advisors will likely prepare a due diligence report on your business and it should be your goal to reduce the likelihood that red flags will be raised.

Prior to letting a potential buyer conduct any of these forms of due diligence, together with your professional advisors, you should conduct “seller-side” due diligence. This essentially means collecting all of the information in which potential buyers would likely be interested, going through it to make sure it is complete and accurate, and presenting it in the way that is most favourable to your business in order to attract the maximum number of genuinely interested buyers and to get the maximum purchase price for your company. This takes time. It takes time because it is often undertaken by only a few individuals who know about the pending sale and therefore it takes time (and often a great deal of tact) to extract key documents from employees in the company who may not be aware (and must not be made aware) that a sale is going to occur.

Discussed below are some specific areas which should be addressed in your seller-side due diligence and some tips about how to deal with them.

(a) General Corporate Documents
While it is always a good idea to keep your books and records up-to-date, in preparation for a deal, it is a good idea to have your lawyer go through your books and records to confirm they are complete, accurate and up-to-date. For example, minute books and records should be reviewed to ensure that annual corporate filings have been made, that the current directors, officers and shareholders are recorded, that annual meetings have been held or resolutions passed, and also that there are resolutions or meeting minutes approving major transactions such as the execution of material agreements. Depending on their state, this may not necessarily be a time-consuming or expensive exercise. However, it is important that this be done right as it can set the tone for the due diligence that follows since these are often the first documents that a buyer’s lawyer will review.

(b) Accounting Records, Taxes and Financial Statement
You should also have your accountant confirm that all your financial and accounting records are complete, accurate and up-to-date. Your company’s accountant should also confirm that all of the businesses’ tax returns (income and HST) have been filed, confirm that all tax remittances have been made and identify any tax assets (e.g., loss carry-forwards) that you may need to consider when selling the business. Selling shareholders may also need to consult their personal accountants to confirm what impact the sale may have on their personal finances. Personal accountants may also be able to help identify tax exemptions (particularly the lifetime capital gains exemptions) might be available to help maximize the selling shareholder’s “take home” portion of the proceeds.

Your M&A advisor may also be able to provide suggestions as to how to present your financial situation in the best possible light and in a format that is compelling for particular types of buyers. Buyers may not bother to do any further due diligence if they are unsatisfied with a business’s financial results so it pays to make sure this step is done thoroughly so as to present as attractive a picture as possible to potential buyers.

(c) Material Agreements
Buyers will want to see copies of all of the material agreements into which the company has entered. Material agreements may include customer agreements, supply agreements, credit or loan agreements, real property or equipment leases, unanimous shareholders agreements, employment agreements for key employees, collective agreements (if unionized), government licenses/permits and authorizations that are necessary to run the business, and any other agreements that create current or contingent rights or obligations for the company. Often, buyers will list specific agreements that they know are material and also request disclosure of any agreements over a certain dollar threshold or duration. Having a good document management and retention system in place prior to selling the business can make it much easier to compile and deliver copies of material agreements to prospective buyers.

Are there any business arrangements which are incomplete or undocumented? If so, it would be advisable to get them updated or in writing so that there is no ambiguity about the fact that they exist and the specific terms of the business’s rights and obligations under them. Two examples of agreements that are often done by handshake are employment agreements and shareholder agreements. A properly documented employment agreement almost always benefits the company by putting boundaries on the rights that might otherwise be available to employees at common law. A written unanimous shareholders agreement can be critical in facilitating a smooth sale, as it can clearly define who manages the business, who has approval rights, and who can sell under what conditions. Your business may benefit greatly at the time of sale if you get into the habit of papering these and other types of agreements as they arise, not retroactively at the time of sale.

In addition, material agreements should be reviewed in advance to see whether there are any change of control provisions (if you intend to sell the shares in your company) or assignment provisions (if you plan to sell just the assets) which may be triggered by the sale. For example, if there is a major agreement with a customer that makes up 30% of the revenue of your business for example, and the agreement states that it will terminate automatically if the company is sold, you need to know this in advance so that you can take steps either to remove this provision of the agreement or otherwise be able to demonstrate to a potential buyer that it will not lose an important customer if it buys your business. This is why it is important, if at all possible, to avoid having such provisions in the contracts you negotiate in the first place or to work hard to avoid client/customer concentration issues.

(d) Intellectual Property
For some businesses, the most valuable asset they have is their intellectual property. You should confirm that all of your trade-marks, patents, copyrights and business names are all duly registered and protected. Have you had any intellectual property developed by contractors? Does the business use any software which has been improperly obtained? If so, now is the time to confirm you have proper assignments from your contractors and to obtain legitimate copies of software.

If your intellectual property is one of your more valuable assets, you may want to take additional steps to confirm how it will be valued by prospective purchasers. An IP advisor may be able to explore the landscape in your industry to determine whether your IP is crowded by competitors or truly occupies a space of its own. They may also be able to get a feeling for prospective purchasers’ IP portfolios and how your IP assets could fit in.

(e) Labour and Employment/Human Resources
The issue of whether employees (both staff and management) will be kept on after a sale is often a key one for buyers and sellers alike. Staff and management may be more important to a financial buyer as, unlike an industry or strategic buyer, a financial buyer will not have the ability to run the business itself after the acquisition without keeping all or most of the existing management team in place. If employees are not being kept on, who will be responsible for notice and severance may be a key term of the negotiation and you will need to ensure that the proper amount of notice (or pay in lieu of notice) is given to departing employees in accordance with applicable law.

If the employees are unionized, you will need to make sure that any necessary consultations with the union are undertaken in a timely manner. Applicable legislation and/or the collective agreement may require that any negotiations with potential buyers are disclosed to the union at an early stage. 

Generally speaking, the buyer of a union operation will step into the shoes of the seller for all purposes with the union. This includes assuming not only the terms of the collective agreement but also liability for any grievances. When negotiating any collective agreement or resolving any grievances with your unionized employees, it is therefore important to ask yourself not only if the agreement or resolution is acceptable to you today, but whether it will be acceptable to a potential buyer of your business in the future.

(f) Real Property
Can you deliver clean title to the real property that you are selling? A real estate lawyer can help determine what is registered on title to your property and whether any such registrations will make it harder for you to convey the property to a buyer. It is therefore important to conduct proper due diligence on each piece of property that you buy before you buy it.

Once a sale is imminent, you may also want to begin discussions with a title insurance company, if you are in a jurisdiction such as Ontario which features title insurance. Many buyers expect title insurance policies, which protect sellers against certain defects in title, to be put in place as a condition of sale of real property. In other jurisdictions, such as British Columbia, you should undertake a thorough land title search of the real properties owned by the business.

Are real property leases properly documented and in good standing? For example, do you have copies of lease agreements and renewals? Leases also generally constitute material contracts of the business so they should be reviewed carefully to see whether the landlord needs to consent to a change of control of the company or any assignment of the lease as a consequence of the sale. You should attempt to have such restrictions removed or at least conditioned when you first negotiate the lease, although landlords tend to be particularly insistent that such restrictions be included.

(g) Licences/Permits/Environmental
Consider which licences and permits you need to operate your business. Are these in good standing? Can these be assumed by a new owner of the business or are they subject to restrictions or termination in the event of a change of control or assignment? If your business depends on its permits, you should ensure that you have adequate processes in place to ensure that your business remains compliant with the requirements of those permits.

If you operate an environmentally sensitive business, you should consider putting a more general environmental compliance plan in place that ensures that you comply with permits and environmental law generally and that creates a record of compliance that could be shown to a prospective buyer. You should also consider educating your staff about what to do if an inspector comes knocking, so that they are prepared to respond to investigations in a manner that complies with the law while protecting the company’s legal position. Prospective buyers may perform due diligence with the Minister of the Environment or other authorities. Your position as seller will be enhanced if your business has had only positive interactions with the authorities.

When a sale looks possible, if you company has not recently undergone an environmental assessment, you may want to consider having a Phase 1 environmental assessment done prior to starting the sale process. The Phase 1 EA will help you become aware of any environmental issues, particularly ones that might constitute a “deal breaker” or have a material effect on the purchase price. Note however that savvy buyers may request copies of any such assessment, meaning that you will likely have to disclose both good and the bad news revealed by the assessment.

(h) Disputes and Litigation
If the business is involved in litigation, a potential buyer will want to get an idea of the amount of the claim(s) and also the likely outcome of the lawsuit(s). Consider also threatened litigation or whether there is anything else that could come back to haunt you, such as a disgruntled former employee. If you think there is anything which may fall into this category, you should discuss with your lawyers whether, how and when to disclose such information and, perhaps more importantly, whether you can take any steps to resolve the issue prior to putting the business up for sale or at least prior to closing.

Conclusion
It is always easier to sell a home that has been properly maintained over the years. One important thing to remember when running your business is that, unlike with your home, someone could come along at any time seeking to buy your business. You want to make sure that you are always prepared for that possibility. To that end, consider implementing some of the suggestions outlined in this article long before you decide to sell your business.