Home | Wealth Management | “The Springfield Problem”: A cautionary tale for middle market owners

“The Springfield Problem”: A cautionary tale for middle market owners

By
Font size: Decrease font Enlarge font
“The Springfield Problem”:  A cautionary tale for middle market owners

CoreValue Software Founder Chuck Richards has lived it – and wants to help others avoid it.

Chuck Richards, serial entrepreneur, academic, and Founder and CEO of Vermont-based CoreValue Software, has seen the destruction wrought by the inability of middle market businesses to transfer their value to new owners.  And he’s trying to do something about it.

Richards grew up in bucolic Springfield, VT, a little hamlet of about 10,000 people in southeastern Vermont.  In his childhood, Springfield was one of the most prosperous towns in the state, supported by a myriad of thriving small and middle market businesses which provided employment and security to its residents.

But in the space of one decade, it all came tumbling down.

“In a matter of a decade, a town of 10,000 people lost 5000 jobs,” he recalls. “So when I went off to college, I started to look for the answer as to how a town could collapse, how could a local economy collapse, and to study the economics.

"And there were no answers in economics.”

"The answer is that the owners of the major companies were all of the same generation."

Richards left academia and began his entrepreneurial career.  After starting and selling 5 successful businesses, he was drawn back to the academy to seek solutions for what he calls “The Springfield Problem.”

"So in another words, how could a town or a local economy collapse, and it turned out that the answer is really quite simple. The answer is that the owners of the major companies were all of the same generation.

"The failure was really a failure to be able to transfer the companies and the knowledge to the next generation.

"Once I understood the basis of the problem, I thought, okay, well first of all ‘how big is the problem’ - because if it’s a small problem, you can have a small solution, if it’s a big problem, you need to deal with it in different way. And it turns out it’s a very big problem.

"In fact it's the largest economic challenge facing this country. If you think about the numbers, there are six plus million private businesses in the US that have payrolls. Of those companies, 75%-plus are owned by baby boomers and those companies represent around 30% to 40% of our job base.

"The scary statistic is the rate of being able to transfer to new owners. Only 10% make it through. Or, in another words, it’s almost a 90% failure rate for businesses to transfer to the next generation or to new owners.

"So if you put all those numbers together, there is a huge demographic wave coming of all these private companies [owned by baby-boomers] which have a lot of our job base inside of them, a lot of our intellectual knowledge inside of them - and a vast majority will never move to new owners. So it’s a huge challenge for this country."

The concept of transferability of value to new owners became an obsession for Richards.  He launched an advisory practice called Chairman’s View that specialized in working with small to middle market companies to both enhance their value and, more importantly, secure the transferability of that value to new owners – thus increasing the wealth of current owners and securing the future of employees under the new owners.

"Chairman’s View was about taking all of the research and the algorithms and the knowledge that I had accumulated over 20 years of studying and building businesses and determining how to apply that to a private business at the owner or the CEO level.

"We ran for about a decade, and what we did is we wold go in and work with the CEOs and the owners and our goal was to make the businesses valuable. We were 95% successful. We would go in and use algorithms and processes and we would make the businesses valuable.”

Ultimately, Richards decided that the best way to ensure both wealth generation and transferability on a broader, more societal level, was not through advisory services, but through widely available, inexpensive software.  And CoreValue Software was founded.

The web-based software Richards developed is basically an encapsulation of his 20 years of advisory practice. Focusing on 18 specific Value Drivers that, based on data from hundreds of companies with an aggregate value of roughly $18 billion, the CoreValue software suite uses sophisticated algorithms to allow an owner, CEO or CFO to assess both the current value of their company and the potential value of their company given certain actions.

"It’s almost a 90% failure rate for businesses to transfer to the next generation or to new owners."

What’s perhaps more intriguing about the program suite is its ability to identify, quantify – in terms of potential enterprise value – and monitor “value gaps” that inhibit a company’s value and/or transferability.  In effect, the system provides a roadmap or dashboard to an owner/management team to continually assess the strength of a company’s operations, its marketing, etc.  In short, its overall transferable value.

"It’s one of the reasons where when people do have deals in terms of private companies, over half of those are never closed. They perish in due diligence.

“It’s because people can’t find a way to prove to themselves - meaning the buyer - that they can really get their arms around this company and make it valuable for them.”

That 50%+ of failed private deals represents the root cause of The Springfield Effect.  Richards and his company are determined to use technology to overcome that challenge.

If you would like more information on CoreValue Software, click here.

Editors Note:  This is the first in a series on Chuck Richards and the solution to The Springfield Effect.  Check back soon for the next installment.  

To listen to an interview with Richards, click here.

 

Join PRESIDENT&CEO on LinkedIn

Subscribe to comments feed Comments (0 posted)

total: | displaying:

Post your comment

  • Bold
  • Italic
  • Underline
  • Quote

Please enter the code you see in the image:

Captcha