Ep2 - Management transition planning - The continuum

Thank you so much for joining us for journey to an ESOP. This podcast is designed to educate. Business owners and management team members that are not currently ESOPs, but really may have an interest in looking at the ESOP as a possible growth or succession or maybe even an exit strategy. Um, personally, I'm, I'm passionate about the, uh, the opportunity with ESOP in the marketplace. I'm passionate about it as a, as an advisor. And really about displacing the wrong notions of ESOPs being either too complicated, um, and really just trying to help educate, uh, folks about uh the process itself and, and trying to really, I guess, bring some simplicity to the process. If you, as you go through the podcast, and if you like what you hear, please, you know, share it with a friend. Um, today's episode is called Management Transition Planning, the continuum. I'm calling this episode the continuum, because it basically means this idea that that management transition planning is always an ongoing activity of any business, um, large, small, um, mid-size. That seemingly never ends and it's just in this place where you're, you know, you may be really mature in this process of management transition, but as time goes on, there's always a need to continue to address this issue. Um, businesses that are very good at this, um, typically are going to be worth more from a business valuation perspective. And so that's, there's a lot of reasons to, to engage in this topic and as we go through it, I think you're gonna, you're gonna find um some, some nuggets of information, some good information as far as um the importance of it and where maybe you're questioning and your team or yourself about where you are in your business relative to the management transition planning. As I mentioned in a prior episode, and I basically called this the pre ESOP timeline, and the, and the pre-SOP timeline is really there to help to determine where you are in the stage and in the last episode was about, you know, there's so much information with ESOPs, and it was about too much information could be dangerous. And the pre-EU timeline was really to help to, to try to determine what information is appropriate in each stage. And when we look at it, it's really to start looking at only the issues on one side of the timeline of the pre-ESOP side, instead instead of trying to glump everything together. And so there's also a post ESOP timeline and what happens to companies again, after they have sold to an ESOP. So we're staying in this one side of that, which is the pre-ESOP timeline. When I look at opportunities for companies and they're and they're looking at the opportunity to become an ESOP company, very early on in the process, what needs to happen is there needs to be a strong discussion, primarily probably in the feasibility stage, but a strong discussion and assessment of where that company is. In relationship to the management transition plan. And I know that seems probably very obvious, but it oftentimes is probably not as as well along as you might think it is, um, only because there's certain challenges along the way, especially for what I would say are small to mid-size businesses. For myself, I've been with our CPA firm and uh for 20 years, and I've been a partner 14 of those 20 years. And I know that every time, you know, for me, I've gotten promoted or done different things in the firm, I've always been thinking very intentionally. About transitioning what I'm doing, my roles and responsibilities to other people on the firm. Um, primarily, there's, there's a couple of reasons. Number one, I mean, I, this is something that I, I advise clients on from succession planning, so I should basically be taking my own advice. And I think sometimes professionals don't know, don't necessarily always take their own advice. So I think it's important to do that. Um, but more probably more importantly and very honestly, I, I get bored with, uh, the, the stuff I get to do and then once I get to figure it out, I want to do something else. So I'm, I'm usually trying to challenge myself in, in a lot of different ways. But either way, it's, it's something I've seen have been extremely helpful in our, in our business, which is a CPA firm and it's not necessarily different than any other business. To, to help promote and retain key people. And I, that is a number 11 of the number one issues for most small to mid-size businesses is how do you keep that talent. And if you're not giving them the challenges and the opportunities, um, when you're stepping aside and letting them grow in their careers, then frankly, they're gonna look at some other opportunities if they, if they're key talent, if they've got a lot of skill sets. So I think there's a lot of reasons to do it. But some of the reasons I find for small to mid-size businesses that are not doing it, have um more to do kind of where they find themselves, and they're not necessarily bad things, they're just realities of, of how things work. Um, when I was a kid, um, I remember in my, in my childhood, I got one of my, my favorite Christmas presents, which was a green machine, and it was one of those cool three wheelers that, um, that are really low to the ground and I was, I used to be able to tear through the neighborhood. And do those cool, um, power slides. And it was, it's a lot of fun and, and the green machine was, you know, you got to move and do a lot of different things, um, fast. I think that a lot of businesses that are say small to mid-size, especially as they've gone through the recession, are what I would call the lean and mean green machines or the lean and green, lean mean market machines where they're, they're so lean on the cost side. When you look at it, their businesses are performing at such a level and they're able to do a lot of things. Um, because they've kept their overhead small, but I believe there's also a, a counter to that or the other side of the coin is that because they've kept their overheads so low, they don't have enough people significantly in those places where they need to delegate. Um, they don't have enough people where they feel confident that that can be done in a way that will um be beneficial and not erupt, you know, maybe some issue or problem. Um, and so they're kind of almost stuck in that place. And really the, the thing in that when you, when you find a business in that with that issue. There needs to be some type of of strategic plan. When, what I mean by that is, you know, a strategic hire that fits the business plan to, to kind of build this out, and it needs to be either a strategic hire or you're promoting within people that are already there. I mean, ideally, that's, that's what you really want. But in some cases, you really have to go out and hire somebody strategically. What that means is for the lean and mean market machine um business is they're going to have to take on some overhead that they may not be comfortable with. And so you have to look at it. Um, as a business, as how important is this? It needs to be beat up, it needs to be a very good business decision, but you need to look at it as, ultimately, if it is a good business decision. We should be able to make an investment and Because I'm a finance person. I would also like to build something around that decision to capture the return on investment. So I need to get something out of this and it may be an investment for a period of time, but how do I get, how do I actually move and 11 way that happens with, with the businesses that are leaning to me and we have to show that the person that is, is moving their responsibilities to somebody else. is able to be freed up for something that will help the business. Now, it could be. Um, and I find this a lot of times that the CEO or the, the business owner is so burned out that there's a, there's a time bomb happening and it could be avoiding a big problem coming up because they can't keep doing what they're doing. It could be that that person could get freed up to do more, um, more selling and business development or or something else that would add some value. So we need to build a return on investment in that model. The, the second thing is, is where businesses struggle with this is the mentality that again, we need to be dishonest with ourselves. If I'm the only one that can do the job and that's my mentality, then I'm starting off with the right, the wrong psychology behind it. And so, This is not a podcast about psychology. I know there's a lot of those, but business people are just people, and they think like other people and they get stuck in these places where nobody can do the job like I can do. And, and it becomes. If it's the main leader of the business, it can become a problem for the whole business and it can become culturally, um, the wrong thing to do as well. And so what you do as a leader, it breeds breeds itself throughout the business. And so, be aware. And I would say be self-aware about where that might be an issue where you don't feel like you can let somebody else do what you do because nobody can do it as good as you. And So the, the, the terminology here, which you've, which we've already kind of alluded to and it's all through um all these different business books is you've got to delegate. If you don't delegate the responsibility of what that role and responsibility is downward or side to side or whatever, you're not going to um to move it. Now, sometimes, you know, the delegation is, as we talked about, is difficult. And so my advice at the very beginning of this is, is just real practical, start small. You know, take something that you aren't that concerned about. Maybe it's um uh your, you know, you're billing your customer a certain way and you, you can have somebody else start doing that or you're, you're, you're having your, um your key person taken over and they're taking that phone call. They're the first one that takes the phone call, um, instead of you taking that phone call. Start small with something that you feel like can um get you out of that mode and, and then build on that as you go. Um, I know that with your team members, they're probably, if they're, if they're really eager to build their career, they're gonna be anxious to have the opportunity to do that. Um, I also think that delegation, in addition to, you know, like the advice of starting small, takes this idea of discipline. We need to be disciplined with our, with anything that we're going to do that, that is difficult. So coming out of January. Now that we're in February, um, you find that a lot of people that came out in January making these New Year's resolutions. I'm gonna eat better. I'm gonna work out. Um, I'm gonna lose the pounds that I'm supposed to lose. And then meanwhile, they're like, you know, just they're, they're wanting to do it, and they have all these good intentions, but life gets in the way and, and suddenly they're, they're back in the same mode of, of behavior. So accountability is very important. And how do we, how do we breed accountability within this management transition planning is, is very important. And I think for Um, some businesses, they have, uh, that I know that they have done a very good job with this is they actually build accountability into the core value statement of the business. And, and they actually live it out. They, they live that core value out and they, they hold each other accountable, um, in teams or in however they're, they're grouping up. Um, I, as a uh advisor would always advise the client to, to think about their team members. As being at like being in a place or a position, um, not necessarily a power, but having the authority to call up the question, like how am I doing with this? Can you, can you give me some honest feedback both from, um, you know, a peer level and a bottom-up level as well for people that are working for you, people that are working with you. Um, do not be afraid of having that feedback because I think, I think that is a critical element of accountability. The third area that I see is that it's, um, it's kind of an overlap, but it's, it's kind of unique in that the, the owner of the business or the person that really needs to get to the delegate is simply just too busy. And you're the swamp of the things that happen on a day to day basis. Kind of take over what that person's doing. And it's like, yes, yes, I think that sounds good. They may, they may even listen to the podcast and be like, yeah, that, that's what I need to do. I need to do more of that delegation. I think I agree with this guy. However, um, they're just get, they get, they get back into the the swing of things. So how many times have you gone to a conference or you've gone to um a motivational seminar or you've gone to someplace and you're like, yeah, that's what we need to do. We go back. And you just immediately go back into the swing of things. So there needs to be something that is going to prompt some change in behavior. And Um, somebody to kind of move that person through. So one thing I would advise on this is. is as the, as this becomes a, a real issue or if you find that this is a real issue, um, the, uh, getting out of the business and scheduling yourself in a, with your team in a retreat setting or in a, um, you know, it could be a one-day retreat, it could be a couple day retreat, it could be Um, just getting out of the business for even a half a day is going to be helpful. And maybe this is the only topic that you and your team talk about. I think that helps to shake away that whole, uh, I'm just too busy and, and, you know, the delays happen again and I'm 1 year down the road and I'm doing it again and it's just nothing's getting any better. Now The reality of this, and then I, I just go back to my, my situation. I, um, I've been the managing partner of the CPA firm for 10 years. And what I realized at the end of this last year is that I really am ready to, to make another change and be intentional. And so, but I've been transitioning the new, the new managing partner for the last 3 years. This doesn't happen over, you know, a, a quick period of time. It takes time for people to be transitioned into Um, significant roles in your, in your company. And so there needs to be a real well thought out plan, um, a plan of action that everybody's part of that starts moving these things through the, the courses, um, that they need to. Why is this so important? And, and I think that what happens with this topic is what we don't realize in the world of ESOPs, in, in any other transition that we're talking about, whether we're going to sell to an ESOP or um and even to a strategic buyer, is having a solid management transition plan is one of those absolute things that are going to be asked about. And the reason I ask about it is it relates specifically to the business risk of the company. And in valuation theory 101, it's the lower the business risk, the higher the valuation. So if I don't do anything with an ESOP company, um, or if I don't do anything around my succession, this is still one of the most important things you should be thinking about in your business to build value. Um, there are a lot of things that you advise, what we advise clients on in terms of building value. Um, of course, increase your cash flow, but if we don't have the depth in the management team, it does take a toll on the company because at some point, there's going to be transition. Like it or not, um, there's always gonna be something that happens down the road. So it's very important, um, to, to understand how important the evaluation or the, uh, the management transition plan plays a role in the valuation. And moving companies through this process and I, and I talked about this in the last episode, we love to have a five-year planning window. Because these types of things do take, you know, particularly, this is one of those things that does take time. And so this is where I would say, um, when you start assessing management transition planning as an issue in a company, um, we start identifying and assessing, are they in this one area where it's really a company that is built around the lifestyle of the individual business owner. Or on the other side of the spectrum, are they in a business with repeatable, uh, streamlined processes that multiple people have, have, you know, grew up in and, and understand so well that they are able to um uh do things without one single person being there. And so as we move the company through that, you're gonna find that there actually is an increase in valuation and an increase in Um, in addition to other things. So, the other thing I would say is, is, is a benefit that I've seen personally as well. Is the quality of life for the business owner who's transitioning their role becomes much, much greater. And so they get more time. To do the things they really like to do. And sometimes they can go see the grandkids more or they, they can plan the trips that they wanted to plan. They don't have to be so tied to the business. Um, everything doesn't revolve around them anymore. And so there's some, some non-financial benefits as well. So with that, um, this will be the first part of management transition planning for this. For this episode. Um, when we pick this back up on the next episode, we're gonna talk about specific, um, ways to go about doing management transition planning. And in that, we're gonna, we're gonna set the tone for practical tools that you can use in your business that will help you um move this along with you and your management team. I want to say thank you for listening to this uh podcast, this episode called the Management Transition Planning. Uh, tune in next time when we get into uh part two of this. And if you like what you hear, please share it with a friend, and again, thank you for, for spending the time with us.