Ep3 - Management Transition Planning - The continuum part 2

Welcome back to the journey to an ESOP on the ESOP guy, and we're continuing with our discussion on management, transition planning, the continuum. So this is part two. I'm on a mission for this podcast to educate business owners and management team members that are not currently ESOPs, and they still, but they have an interest in, in looking at ESOP as a possible growth strategy, succession strategy or an exit strategy. So the reality in our world of ESOPs is that there is a lot of information that I'd say a lot of wrong notions about what ESOPs are. And so part of the plan in this podcast is to try to um dispel some of those wrong notions, um, either as ESOPs being too complicated or really provide more of a simplification of the process. So if you like what you hear, please share it with a friend. So managing management transition planning. The continuum part 3 that are part 2. The continuum was really this idea that management transition planning is kind of an ongoing, always going um management um necessity that happens in every company. In some, in some cases, we, uh, the business is in a place where they're, they've done such a good job with management transition and it's not really an issue, but it's, it's always something that has to be assessed. As we talked about last time, there are multiple reasons why some companies actually when they're assessed in this area are, are scoring low, and to understand those, to make sure that we look at that as, as a reality and maybe sometimes a barrier to uh to not doing management transition very well. So the first is just this idea that some companies are just really lean on me, and they, they are a low cost, um, from an overhead standpoint, and they get a lot done. That way. And that's a very advantageous thing to be in the, in, in the marketplace. But in those environments, it's sometimes difficult to transition because simply there aren't people around in that organizational structure to take over and in those cases, you have to have some strategic hires. The second is that in some, sometimes within the business owner or some of the management team members, nobody, there's a, there's a psychology or mentality that says nobody can do the job as good as I can. So that's a barrier to delegation and that can be an issue. And then the third is that that, that business owner is just too busy. There's too many things going on, and they don't have the time in their schedule to start to move and transition areas of their responsibility to other people. Now, the reality of this is, it's really how important is this when it comes to an ESOP, a company that's trying to go to ESOP or a company that's just trying to sell. Management transition planning is, is a key aspect of every business valuation. And it's the reason that is so important is because it's, it's, Inherent in the risk of the entity. And so that what that means is that it's a real big part of, of the risk profile of that subject company where if there was something to happen to one person, That was performing a A very critical role. And that would affect the revenue of that company in a way, the income of that company in a way that was significant, then it can absolutely affect the evaluation in a negative way if it's not being taken care of. It's a, it's also something that your banker would talk to you about as a credit risk, if there's not a lot of management depth in the business. Now, when I was in high school, I was not very athletic, and, but I wanted to build my high school resume. So I decided to join the swim team, and I immediately realized when I'm in practice, As I'm swimming laps that I overestimated my ability, um, and underestimated the difficulty of this sport as I would, um, literally just try to survive practice by not gulping too much water and drowning. And so I did survive, um, I did make the swim team, which was only because we didn't have enough people trying out on the swim team. And so it did not, um, surprised me that I actually got on. Um, however, I ended up getting the backstroke, which is a very difficult stroke, um, to swim, and I basically learned by watching a video and practicing and, you know, practically killing myself in it. But, um, so I did the backstroke for our, our swim team. And I was so bad at it. But, but what would happen was that during the meets, I would, I get so, um, competitive. I, I, I'm still competitive. I'm just not, I wasn't very athletic. Uh, get so competitive that I would wanna do my best and I'd swim faster and I would get kind of a, a crooked angle and the next thing I know, my, my arm is stuck in the, in the lane. And so then I have to get unstuck and it was just a big, it was a big mess. And so that made me think of as as we start thinking about swimming, is how important it is to be a good swimmer, how important it is to stay in your own lane. And I think with management transition planning, the very first um concept of this is, is what lane are you swimming in and who should be in that lane. And so with business, There is, there are functional processes that are conducted by the people in business and from a leadership standpoint, all all the way through, um, everybody that has a job in business. And so, In the business. So what we have to be aware of when we start thinking on a bigger, bigger picture is where, where are those lanes? And where our tendency is to look at the titles being the indicator primarily of what those lanes are. And so, When you look at titles and management, you're obviously gonna have like a CEO, chief executive officer, president, uh, chief financial officer, controller, uh operations officer, chief operations officer, um, sales, vice president of sales, and all those are um important roles. And so we, we can sometimes start to think that those, those people do certain things, but when you realize that small to mid-size businesses, Um, a lot of things happen at different levels, and the titles only are an indicator. So what we want to do at the outset is to really establish clear lanes in terms of what are the actual roles and responsibilities that are tied to those roles. So, before we get into that, I wanted to stop and say and in terms of using um resources that we use to help clients get through this management transition planning process. One of the best business books that I have read, And actually have applied to our own business. is a book called Traction. And the book is written by an author named Gino Wickham. And the books, the title of the book is actually get a grip on your Business. This, um, this book has been used by a lot of businesses that I know, and, and there's a lot of practical tools to take the strategic plan that a business has and actually execute it with some type of um practical way of going about it. So what I like about it is there's, there's a business book that actually gives you some tools to use in your business from a real-time perspective. And so, as I, as I lay that out, I'm gonna be using that as we go into the um what I think is a, is a good piece of advice in terms of getting yourself started within your management transition planning. And so, the first, before we get into that, the first thing I want to do is just set up what are our goals and what are we trying to accomplish when we're doing management transition planning. Well, the first goal is to provide clarity. As to what functions. What responsibilities in the business need to be performed to achieve success with goals? And so that might seem like a very obvious goal, but it's very important and I think that for some businesses that haven't documented that, um, I think sometimes there are uh some light bulbs that go off that are really important. The second is, is to really understand that as we transition roles in the business, we are aware of both internal and external factors, which means, let's just say for instance, I'm transitioning the CEO role of a business. We understand that there's not just the actual functional roles being changed, but there's actually a perception about the business that's going to change. It's going to change internally with the employees. And it's certainly gonna change externally with the customers, with the bank, with the bonding company or whomever else that, that CEO whoever else that position is, that's doing um has relationships outside of the business. So we need to be conscious of that and, and our goal is to make sure that we're incorporating a understanding of that within the transition plan. And then the third goal would be to establish this, and this is the practical tool that we're taking out of this traction book, but establish an accountability chart. That will help us to understand not just the functional responsibilities, but the accountability of those within the current existing organizational structure. Now, this is going to help us. To then create A matrix and a timeline related to how we're actually documenting the transition from the actual person to the responsibilities they have, and to who they are going to, and we're gonna get into that as we go. So those are the, those are the three goals that we're going to start with. And They're really important as you start talking about, as we start getting more focused into the responsibilities and the roles. Uh, the, the idea behind responsibilities is that, um, what we find is we start going through documenting the responsibilities or the functional responsibilities, um, that there's sometimes old processes being used. There's old technology being used, there's redundancies, there are inefficiencies, and, and frankly, there's other types of seas that need to be addressed. And so this process leads us to naturally talk about efficiencies in your business. It's not the primary goal, but it will lead us to, to start thinking about how could we do this more efficiently or or more profitably. So with that, if we look at the difference between what is a role, and then, and that means like the title of the person. Versus what is responsibility. So generally roles are the position that team members assume. And the part that they play in a particular business and sometimes the confusion is, is we think that that is the same for some other businesses and, and, and, and sometimes they all kind of blend into each other, but the role itself isn't always exactly what the responsibilities are. And that's the main differentiator. When we start looking at it, why we want to separate the role from the responsibility is because we need to know exactly what we're transitioning in terms of the management transition planning. So responsibilities um are, and I call them functional responsibilities because there it's so important that there's, there's a function to it or there's a, there's a reason you're doing it. Um, are specific tasks or duties that members are expected to complete as a function of their role, or more, more specifically as a function of of making the company do what it needs to do. So, these are specific activities or obligations, which they are really held accountable to. So an easy example of that is just, hey, I'm a sales, I'm in charge of the sales department, I'm vice president of sales, and I'm responsible to bring in Um, this much in revenue every single year, and it's, I'm accountable to it and I have a goal set with my team members and with the management of the company. And if I accomplish my goal, then I've done my job. If I don't, then I haven't. Other times within a sales is much easier, but within other times of the other parts of the business, it's somewhat more difficult to apply accountability. To other parts of the business. So there, but accountability is ultimately one of the most important elements when you look at executing your, your business strategy. So even though we're going down the road here a little bit in terms of, of, of that idea, the whole premise behind this is, I need to be transitioning. The functional responsibilities to other people, not the ones that maybe are not so helpful to the business. I think that's a real key aspect of this. So, so that's why differentiating those at the front end and really looking at those specifically is very, very important. So the way that we start with this process is, you know, an inclusion, inclusion kind of way is, as a business, what we want to do is pull our leadership team together. The first step is, is really assign this, this task or this workshop to pull everybody together and identify. In the business, the specific business areas that we are, we are functioning at. Now, an example of that would be, we have a business that has a finance department, an operations slash production department, we have technology department, we have a sales and marketing department, we might have a customer service department. And so each one of those has its own accountable responsibility. In the business and that they need to accomplish daily, weekly, monthly, annually. And so the first step is to document each one of those areas for your specific business. What we're not doing is we're not starting off with an organizational chart. We're not starting off with a chart of people with titles. Not that that's not helpful, but that doesn't get us to the place where we are truly looking at the functional responsibility of what's happening in the company. So we're literally looking at it from without people on it, and just what are the departmental responsibilities that need to happen. So once this part is, is documented, and it can be documented as informally as putting it on a piece of flip chart paper. The next step that your leadership team is going to take is you're going to want to start looking at within each one of those departments, the functional responsibilities within that department. So for instance, it's the easy part like would say finance, finance is going to be responsible for. There's somebody in finance that's gonna need to do a financial statement every month or however often. Somebody in finance might be doing the billing and collection of, of receivables. Somebody's probably doing some kind of payable. So there's, there's these general functional responsibilities that we have. Now, there are some companies that have unique areas that they do within these um business areas or these, these functional responsibilities. Those need to be documented as well. So once everything is documented, then the team has the opportunity to take a fresh look at it all. And what they want to do is. Take those and look at how do I prioritize those functions to the point where You could go with this, if this doesn't happen, then the business is in significant trouble, that kind of, that kind of mentality, or we could go with, this is our, as we start looking at our business plan, and we look at the actual strategic area of the business plan where we're trying to execute. These are the highest needs that we have in order for the company to move closer to its main goal of growth, or whatever the goal is. And so we want, we want a system to prioritize each of those functional responsibilities. And the reason that is is because you, you could find that within each of those business areas, there are just a lot of different areas that we, we need to think about and cover. Now, so as we build that functional responsibility list within each business area. We also have the opportunity to identify. Areas that are redundant and maybe not even effective. And so there, there's there's opportunity sometimes to eliminate functional areas of responsibility that don't even need to be happening, or they need to be tweaked in different ways. So we need to ask questions at that level. On the opposite is true as well. There are times where you look at those responsibilities and you realize, hey, we don't have enough emphasis put on this one functional responsibility that we want to really um emphasize this year because our business plan is, is pointing us towards that. And so we want, we want to put more energy into that and we want to prioritize it, maybe we want to even talk about the process we're going through. So, what we don't want this to be is a complete efficiency overhaul. But the reason I stress these um redundancies and the elimination process and the add-on process is because what we don't want to do is transition um responsibilities that are being done in a way that is not in line. So this is kind of an alignment issue with the core business plan of the company, and, and, you know, more specifically the strategic plan. Once we can pull that together and align it, then we're able to then really make sure we're transferring the right things to the right people. So the next phase of this is going to be to document this. Business area plan with a department leader who is now in charge of that area. Now, that could be the existing leader, most likely it will be. It may be somebody that we need to hire, but either way, we need to document it with the person and their title. Once that's done, we pretty much have the the beginning makeup of what we want to use to start to create what I would call the matrix. Of what we're, we're going to look at transitioning. And so, if we take it very simply and say we, we're just literally transitioning the CEO who's selling their business as an ESOP, and the CEO is looking at a two-year transition plan. And the CEOs um in this matrix, and their responsibility is primarily business development. Um, their responsibility is interviewing key talent and recruiting and interviewing key talent. Their responsibility is acquiring new companies. And so if I just take those top three things, which are things that CEOs do. Now I look at who in my, my new accountability chart as I look at the matrix, who is coming up to take over those responsibilities, and I build out a timeline that starts transitioning those functions. And what that does is it pulls it together in a document that now bring brings this clarity to the to the entire leadership group. Now, this is all before we've we've entered into any type of communication with The internal world that we have with our business, which is the staffing, and it's before we, we enter the world of our, of our external worlds of, of explaining this transition to customers, suppliers, uh, to, uh, all kinds of other, the bank, any other, any other third parties. And so that matrix and that timeline really provides some clarity and, and it holds the whole team accountable to the process. And I, I guess this goes without saying, but I'll say it. That absolutely requires in my mind, a buy in at every single level of your leadership group. With the buy in and without that consensus, then a lot of this, a lot of this work and documenting and detailing that plan really do not, are not going to be as effective as they need to be. And so, that would get you started to start working through a management transition plan. And the sooner you start, the better it is, I believe. And if you already have this, this documented, then I think just being aware of that as part of the ESOP is really important. And I will leave you with, with this and, and I started with my high school swimming story, but in, in part of my high school career too, this is before the swimming, I had gone through one of those like dark, dark summers where I spent most of my summer watching. The Love Boat. And for some of you, you might not even know what that TV show is, but it was on a long, long time ago. And on the love boat, there was Captain Steubing and, and Isaac, who made the drinks and Julie who was helping all the customers and there was a, a purser and there's all these different people. And what was nice about the show is every single show, you know, it's start, there'd be a problem and and it would all finish, but because everybody did their job really well. At the end of this story. Everybody falls in love and they all live happily ever after, which, frankly is what we all want to happen with, um, you know, our businesses, maybe not everybody fall in love, but with our businesses that everybody lives happily ever after. So the whole idea behind that is, is as we align ourselves correctly and we're all doing the job we're supposed to be doing and staying in our lanes, then everything works really well that way. So, thank you again for joining us on Journey to an ESOP. And if you again like what you hear, please share it with a friend.