How to build an effective management team

To understand why a small business needs a management team, Sean Wise, professor at the Ted Rogers School of Management, Ryerson University, Toronto, sums it up succinctly: “People are central to business success.” Mr. Wise, also a venture capitalist, has quantified that assessment. “Eighty percent of my investment decision is based on the quality of the management team.”

Of course, that team must be able to act. “Small business owners are used to being in control, so it’s hard for many to delegate. But it is also absolutely critical for the success and sustainability of any small business that they do just that,” says Catherine Swift, president of the Canadian Federation of Independent Business (CFIB).

That is why the CFIB in particular has done so much work in the area of succession planning. “Any succession plan should address the ultimate withdrawal from the business of the owner, but it should also plan for the unexpected,” Ms. Swift says.

For small business owners who tend to wear many hats and are busy dealing with day-to-day operational issues, it’s a tough sell — and a potentially big mistake.

Kevin O’Leary, Chairman of Gencap Funds and manager of the O’Leary Global Equity and Income Fund, follows a simple philosophy for equity plays: “Don’t invest in a business where all the assets can be run over by a bus the minute you sign the deal.”

He is not alone in this belief. “A management team puts a better face on the company to potential investors,” Ms. Swift says. “A business that is totally dependent on one person — that’s a risky business.” She cites tech giant Apple and its plunging stock price on the announcement that founder Steve Jobs would have to step away to deal with health issues. “If you have a solid team behind you, it will play better with bankers and suppliers. Everyone wants to feel they are dealing with an entity that will be there next week.”

Finding and keeping talent is always an issue–even now that the labour market has loosened up. “The economy will grow again. We don’t think it’s going to be a long time before it starts picking up,” Ms. Swift says.

Hiring well

Hiring and retaining good people is key. “People want to be informed. They want to be part of the decision-making process as much as possible,” Ms. Swift says. “That means keeping them in the loop. I think it’s just good business sense, period. Nobody has a monopoly on brilliance. You will end up with a better plan when you let people in. Make the time to do it. This is all commonsense, but people don’t take the time to do it. Assign people responsibilities. Delegate. They still have to report back to you.”

So what makes a good management team? Mr. Wise has researched that very question, reviewing more than 100 successful small businesses. The result? In 86% of the cases, the management team had all three corners of the talent triangle covered.

Talent Triangle

Mr. Wise breaks down his findings: To be a successful, high-growth business you need to cover off:

Business acumen (the ability to run the business, understanding how the banks work, what insurance is, cash flows, projections and related issues); domain knowledge (understanding your client’s needs and what it’s going to take to sell to them); and operational experience (experience delivering some of those products).

Mr. Wise uses the talent triangle to build a strong management team and has created a four-step program to help small business owners do just that.

* Know your own weaknesses and where the triangle needs to be enhanced. “Use the talent triangle to analyze where you are weakest,” Mr. Wise says. “If you lack business acumen, find someone who does.”

* Build a board of directors/advisors regardless of the size of the business. “The mere fact that you are able to involve advisors shows that you are open to taking input from other sources,” Mr. Wise says. “That whole process is necessary as a sole proprietor moves into a larger, more scalable business.”

* Find people who are better than you in the areas where you are weakest. Henry Ford said it best, Mr. Wise notes: “When asked, ‘what do you know about engines for the new cars, sir?’ He said, ‘What I do know is where to find the guy who knows everything.’”

* Undertake the three-part Rabbinic test of partnership: the cup, the sword and the wallet. “Before you partner with someone you should test these three areas,” Mr. Wise says. “The cup represents success. How do your potential partners view their success? Do they say, ‘I’m the one who made this happen?’ Or, do they say, ‘We have a great team’? One or the other is not a better statement. It comes down to which one resonates with your own approach.”

The sword represents how you deal with conflict. “Make sure you don’t start a partnership with someone you have not had a major fight with, because it is only by knowing how someone fights that you know what they are like when things go wrong,” Mr. Wise says. “You don’t want to invite someone on to your management team until you’ve argued with them and see how you are able to resolve it.”

The wallet test comes down to money. “You should judge someone not by what they say is important to them but what they spend their money on,” Mr. Wise says. “It’s fine for someone to talk a good game about how important community is but if they never make a charitable donation or volunteer their time, aren’t they just full of [it]?”