CEOs in the lower middle market operate in a transition zone. It’s a proving ground for founder-CEOs to become great leaders and operators… or get replaced.

As obvious as this statement is, it’s true. While it might resonate differently depending on your experiences with people in your own life,

People are different. So are CEOs.

I’ve worked with a variety of personalities. From sociopaths and narcissists to downright good, honest folks, I’ve worked with them all. And unfortunately, business throws some stressful and challenging situations around like Mardi Gras beads in early spring. Some of those beads catapult at velocity straight into the faces of festival-goers who miss the catch. Some gracefully glide from parade float to outstretched arms like a slow-motion film. There are CEOs who unfortunately are unable to calmly and professionally handle pressure or conflict. There are others who are. Some cower at the thought of having a tough conversation, while others can exemplify empathy while resolutely speaking through the moment. Some conveniently leave town before a board meeting they had their office manager schedule for them. Others schedule the meeting themselves and show up first.

It’s easy to point fingers and judge a CEO’s job from the sidelines. However, it’s actually a tough job to hold and perform well. Many founder-CEOs who initially started something scrappy and got friends and early customers excited are the masters of getting something off the ground. Of those founder-CEOs, fewer are versed in the nuances of transitioning to a large-scale enterprise, HR, managing institutional money and investors, and having to make hard calls to lay someone off, cut a business line, or take the blame for a decision that didn’t work out.

There’s a lot of psychology involved in blaming others when we cannot accept or own up to our own failures. CEOs experience this all the time. The job of the CEO generally will never make everyone happy all the time. In fact, the job is almost all about making divisive decisions — there is always someone who doesn’t agree with you regardless of the outcome. You really can’t win as a CEO, unfortunately.

However, there are those people who are gifted with patience. They are gifted with reason, logic, and wisdom. They were blessed with the ability to discern the risks worth taking vs. risks not worth taking. They might not get them all right, but they have the ability to take in data, make an informed decision, and stand by it. Personal integrity is a big piece of it. If you have the self-awareness and moral compass to own your decisions or know when you don’t know something, you probably have the self-awareness to focus on developing and achieving any of those skills. These are the CEOs worth following. These are the founder-CEOs who tend to be better suited to grow into a great operator and take a brand out of the lower middle market.

The transition from startup to formal institution

The lower middle market is the proving ground of the corporate lifecycle where startups become institutionalized. It is the transition point where you have to start putting formal HR and employment practices in place so you can avoid lawsuits for the formerly willy-nilly hiring you got away with as a scrappy startup in a coworking space. You have to hire a real finance team, abide by audits, get legal counsel more often, and develop relationships with lenders and investors. You generally can’t shoot from the hip anymore.

This is the critical growth juncture where founder-CEOs either rise to the occasion and transition to “operating-CEO” or they fail in getting the company to its next growth plateau and get replaced, whether they want to or not.

More times than not, I find the latter to be more common. I’ve seen a lot of founder-CEOs get to a point in their growth trajectory where they feel they can do no wrong and keep operating in a way where they think everything they touch turns to gold. They hire and fire at will. They throw money at new initiatives without any planning. They intermingle personal finances with the business. They ignore counsel. All sorts of stuff.

9 times out of 10, they run up against a brick wall, higher-level growth investment decisions don’t work out, and they realize that getting from a $5 million company past a $50 million company (and keeping it there) is really, really hard. Usually, this is when the board steps in to transition the founder-CEO out and get a “seasoned executive” to step in and run the company.

I’ve seen this formula play out a lot in this stage of growth. Though it doesn’t always work out. Sometimes boards bring founders back in, realizing that a lot of the brand equity and customer loyalty are tied to the founder running the show. Usually, this is when boards then bring in a strategic COO or CFO to run things from the sidelines while the CEO represents the face of the brand.

CEO self-awareness can avoid these transition or replacement pains

The key: If you’re a CEO in the stage of growth where you’ve raised money, have a board and investors at the table with you, and you want to know how to get to that next stage of growth, be self-aware.

Know that continuous growth trajectories aren’t guaranteed, and you need to be realistic about where the business has opportunities to invest. You’ll figure this out one way or another. Either you’ll experience failure before you get it, or you’ll have a mentor that you trust guide you through it (or some other path to enlightenment).

This transitional phase is where maturity as a leader takes place. You either have the self-awareness to know when your skillset isn’t set up to take a company from $5 million to $50 million and you need to replace yourself with a seasoned operating-CEO, or someone else decides it for you. You want to be in the driver’s seat for that decision. You don’t want it forced down on you. It’s messier this way.

It’s interesting riding in the sidecar as CFO through these transitional phases. It’s the CFO’s job to keep cash in the business where possible, keep a pulse on which areas of the business are working or not working, and provide strategic insights and guidance to the board and those in charge of governance. CFOs don’t operate the business, though many times it seems as though they are the ones who get the blame from CEOs when things aren’t going according to plan.

I’ve noticed the character shown by CEOs through these difficult transitional times tends to represent who they are as people:

• Do they have integrity and take ownership in tough times?
• Do they pass blame around the conference table trying to deflect ownership?

Trust me, boards and investors notice. And if you are on the board or run a private equity or VC fund, you know that in the lower middle market, it’s hard to hide. Teams aren’t that big, and ultimate authority can’t really be diffused through 10 layers of corporate hierarchy. Founder-CEOs who fall into the first camp tend to be the ones that make it through the transition zone and can grow into a great operating-CEO. My advice to CEOs in this period: look in the mirror: are you a courageous leader? Or are you going to break under the pressure?