Your Biggest Asset and Liability

In last week’s episode of Dragons’ Den, one pitch went sour for the simple reason that the biggest asset in the business was also its biggest liability. This is a fairly common problem in family-run businesses, often a function of one member of the family remaining in control of a business even when it has grown far beyond their ability to manage it.

In this particular case, Kim and Paul Nolet were unlikely prepared for the reception their business would receive on the show. Their product, an electric scooter with some pizazz, was driven out of the den for the simple reason that the creator of the scooter was not a savvy businessman, yet would not relinquish control of his company to make it profitable.

Paul Nolet manufactured the scooters in his garage, and would sell them for a price competitive with wheelchairs. With his margins so small, Kevin O’Leary suggested he raise his prices to about $6,000 a unit, which would provide a healthy margin to make the business viable. Paul’s response was admirable, but businesses are not built that way:

I prefer to make my living the honest way.

It’s very noble to not fleece your customers when you have a product they clearly want, and would pay any price for. However, there is still the issue of charging fair rates for the products, and Paul’s price fell far short.

Kim Nolet, who appeared to be more business savvy, was asked what the biggest problem her business had. She seemed amused when the Dragons informed her that Paul was the biggest liability, but they weren’t joking. With every decision needing to be cleared through Paul, there was a limitation on the ability for the business to grow. Paul was set in his ways, and had his opinions as to how the business should operate, and appeared reluctant to move from his position.

This is not a surprising issue. Perhaps one of the more difficult tasks investors face when working with a new business is in determining which portions of the existing management can bring the business to the next level, and which portions need to be trimmed and removed. The biggest obstacle is often the egos involved – people who have put incredible amounts of effort into growing the business don’t like to be told that they are no longer needed.

In various articles I’ve written about succession planning, this is one scenario I didn’t discuss, though it is relevant and perhaps one way succession happens that people partially plan for. How will the business transition under the new owners, and how will the current management team evolve to a new team?

If your business is prepared, this transition can be smooth, making such opportunities a dream to execute. Unprepared, though, and even the best of businesses can fail for the sole reason of lack of foresight.