One of the biggest challenges a business owner has is determining where to allocate expense dollars. In Fortune 500 companies, budgets are set, and departments can spend the budgeted money. The money belongs to thousands of shareholders with which there is rarely any contact. It’s almost like spending play money.

Decisions to spend money are much more personal in mid-market businesses. There are usually only a handful of shareholders at most. While budgets are determined, the money in those budgets, and any expense above and beyond budgeted dollars, comes directly from the shareholders’ pockets.

In the 20th century, developing leadership and developing talent was looked at as an expense. If times were good, money was set aside to spend on training. At the first sign of downturn, these were usually the first expenses cut. When business begins to pick back up again, leadership development is usually the last thing added back to the budget. The message sent across the board was that investing in people was not a priority.

In early 2020, many businesses, but not all, automatically viewed leadership development as an expense and not an investment, and they cut back. Certainly, some organizations were fighting for their survival and could not continue with their development commitments. However, and just as certainly, organizations who could and should have continued reverted to the expense versus investment mindset.

Leaders who maintained an investment versus an expense approach provided a level of normalcy to their leadership development candidates. Maintaining a focus on intentional development sent a strong cultural message during a very challenging time. They built loyalty as they built their organizations.

Investing Pays

There may be no single thing a business owner can invest in to provide the kinds of return on investment that can be realized with leadership development. As we discussed in our first two books, retention is a key component to return on investment. By retaining talent alone, businesses should be able to pay for a significant leadership development initiative. However, this only scratches the surface.

Visionary business leaders need to understand the multiple interconnections of their leadership development investments. Top talent attracts top talent. Top talent will be retained with strong leadership. The better the talent, the higher the productivity. The higher the productivity, the higher the profit. The greater the commitment to development, the higher percentage of engaged workers. A higher percentage of engaged workers drives higher profits. Higher profits drive shareholder value. And round and round it goes.

Future Leaders Add Value

Investing in leadership development is a commitment and a long-term investment. It can be the focus of your organization with spillover to make everything more effective and efficient.

As Solutions 21 began to work more with our clients when they were buying, selling, merging, or simply taking money out of the business, I began to see a pattern emerge from the people who value businesses. Whether it was a financial buyer, an outside firm valuing the business for internal employees, or a bank loaning money to recapitalize, they all asked similar questions.

Every single financial institution looked at the management and leadership team. How good were they? Were they being developed? How likely are they to stay? How well do they understand the strategy? Were they involved in developing the strategy? In other words, how good is the next level of leadership?

“When you think about your house, what does the real estate agent say to you every time they tell you the value of your house: location, location, location,” says Craig Heryford, partner at Gordon & Rees Scully Mansukhani and chair of the firm’s Business Transactions Practice Group. “When you look at a middle-market business, it is management, management, management. It doesn’t start or end anywhere else.”

Heryford’s quote could have just as easily said, “leadership, leadership, leadership.”

Adapted from our upcoming book, The Leadership Decade: A Playbook for an Extraordinary Era. If you’d like more sneak previews, exclusive content, and early access to the book, join our Launch Team at https://s21.us/launchteam.