EP30 - Interview with Jack Veale - Building Ownership Culture

Welcome back. Thanks for tuning in. I'm the ESOP guy, and today we are continuing on this journey to an ESOP. So for those that are just tuning in today for the first time, this podcast was created and produced as a resource for you to better understand the whole ESOP process and really for those companies that are thinking they may want to consider an ESOP as a strategy for their business and it could be that they're Looking to uh take the tax benefits and help their business grow, uh, or could they, they could be planning a long term exit or a succession plan of their business, but either way, the ESOP has a lot of things to know and understand. So that's what this, this podcast is to do is to really to be a resource for you. Um, this episode is going to be titled Building an Ownership Culture by Creating strategic Innovation, which really comes directly from the title of a book written by Jack Vale. So today we are going to have the opportunity to dig into the concept of transforming your workforce and key managers to become owners or have ownership thinking as part of the process of preparing to exit your company for an ESOP. And we're gonna do that by interviewing the author of this book, Jack Vale. So, for the listening audience, this will be a really helpful episode to illustrate the importance of an ownership culture and show the very helpful resources that, that are available to help guide you through this process. So Jack really has um assisted many and hundreds of clients on business ownership transitions and uses ESOP in his workbook to help guide business owners and how they're the best used teams in their organizations. So with all that, I just wanted to say welcome Jack to the podcast episode. It's his first time. Jack, it's an honor for me to have you here on the podcast today. Well, the honor comes with me too because I know this podcast has been something that you've been working on for a long time, so for me to be a part of this is being awesome, so. That's great. Thank you for inviting me. Excellent. So Jack, before we jump into the interview, can you share with us really how you got into working with ESOPs when you're really known as a family business consultant? Sure, be happy to, um. Back in the 90s, I became a part time CFO and evolved into changing my company name, which is PT CFO Link from part time CFO to professionalize the corporate family organization because what happened was I was, I was asked to come into a family business and help work out a transition plan for that to be bought out by the kids. And so it ended up uh somewhere around the 90s, late 90s, um. And one of my clients was seeking to or considering doing an ESOP, a partial ESOP, a very small portion, and asked me to come in on the long range planning to train the kids who were not kids, they were his employees that were longtime employees. And, and, uh, train them to buy him out. And they were going to use an ESOP to do that. And so that's how I got into an ESOP. I helped them through their process and uh but they had a transactional, they got the lawyers, they got the valuation people, they did all that stuff. But the real problem he was concerned with was with the management team. Could they, could they take over for him? Because if not, it wasn't gonna work. Yeah, cause you can't just walk away from the business, uh, especially when you do an ESOP and they owe you money, um, and not be able to um have the business operate the way that's, that's a very common concern almost every owner that I talked to. Yeah, it's not an easy one. And, and by the way, uh, A lot of ESOPs fall apart because of this condition, because the management team isn't ready to take over. There's no solution, and the business owners desperately looking for solutions. Yeah, what's interesting about your story too, and, and I've done succession planning for 15 years and the family succession planning is, is to me one of the most difficult parts of it because you're dealing with not just business, a business decision, you're, you're dealing with your family members. And then when you layer in an ESOP on top of it, it, it is um very complex and I think it's interesting cause you're rolling that together too with planning with the managers to take over the business but that element of family is really difficult. Well, and, and, and the leadership development process isn't isn't for everybody. Um, the best sales guy or gal may not be the best president. And uh if there's a child that was promised, I have, I've got several stories, more than, more than many, where, where dad promised the child the business, then sells it to the ESOP instead of to the child. And that creates, that creates holiday problems because now Grandma can't see the grandkids because dad because Grandpa pissed off that. Yeah, family conflicts and then that comes back into the business too and in so many ways. So, so that's very, it's interesting. Um, when you say, when you talk about the business culture, when you talk about ownership culture, whether or not the company transitions to an ESOP or not, why do you feel like that's such an important element of, of business culture? So in any organization, the the goal is to make money when the reality is, if you don't develop your leaders, and you don't have a value system that manages those people into intellectually, then you, you're going to have a problem. Um, we use culture as we consider culture as an operating system for the company. All the peripherals, the sales, the marketing and all that stuff is all the peripheral to the to the culture of the organization. And, and you have to have a clear understanding, what is your culture, what's keeping you together? What's what, and it's not just money, by the way, what's making you perform well, all those kinds of things are cultural, rewarding people for getting along versus getting things done is a cultural issue. Not increasing your sales is not a cultural issue. It's a results issue. And it's based on what have you done. To drop the sales. Mhm. And so then you start looking at Efforts and when the reality is that there's conflict in the organization because values aren't being followed. And that's where the culture comes in. And that's where in an ownership culture, uh, the best way to describe an ownership culture is renting a car. And uh if, if you go rent a car and you typically, when you finish driving the car and you're returning it, you don't, you may stop to gas it up, but you don't wash it. And why is that? Because it's not your car. And you don't treat it well because you, you'll gas it up, but you won't wash it. And so owners wash cars and they, and it's hard to teach employees to wash cars. Uh, it's just like teaching your child to mow the lawn well. If you, you know, just mowing the lawn sloppily, there's a training issue about, look, this is, you've got to own the quality of your work. And that's where an ownership culture comes in and how that does differentiate typical companies from ESOPs because they understand that it's an ownership culture. It's their company. We need to teach you how to wash the car so that you do it instead of me. Right. And it sounds simple, right? Because, you know, especially if you're, you're a parent too, you know this with your kids, they don't really know what they have until they have to work for themselves, um, or they'll use your car and they won't really treat it right. But I like, I like the metaphor, and I think that, um, as simple as it sounds, it is, it is difficult to establish that in a, in a culture. So, so if we talk about that, how does your workbook, you know, in terms of the, the title of that workbook again is Creating strategic Innovation. How does that help a business owner with that type of ownership transition? Well, typically, um, just as an example for you, do you have children? Oh yeah, I got 3 kids. Were you, did you read a book about how to raise children? Um, my wife wanted me to, and I, and I, I should have, um, but no. OK, and that's OK. You're typical of many parents. It's on the job training and, and the challenges is that not many people will read the book. And so what they do is they, they splash along trying to keep the waters, you know, as calm as possible when the reality is they should have read a book on how to do ownership transition. This is not a book for reading. This is a book for work. It's a workbook, so it's it's, it's different. I'm not going to tell fancy stories from other clients and all that stuff. That's, this is a workbook that says, here's how you do it. It's got 10, depending on which version you have, there are 13 chapters and it starts off with how, what is a team system. Uh, how do you build decision skills using teams? Uh, what, what are the problem solving skills you need to have? What are what are customers? How do you measure yourself? How do you implement change, and it goes on and on. And there's a portion in there for personal development, so that as a as an individual, what culture do you have and what values do you have and what um what are you doing about developing yourself personally? You don't find a book that has this, and the reality for me is when you try, I'm doing this right now, I'm introducing a client, an ESOP has to be, it's a 100% ESOP, and the owner has been paid off and the new management team has now come, is now wanting to take over and has hired me to build their leadership through this process. The goal is to get as much experience and leadership as possible. So you form teams, build the leader to it. and solve a problem. And these are small problems like how do you wash the dishes. This is about how do you build a house. What are the, so it's not about dishes, it's about houses, building houses, and there's a big complex problems and typically the top 5 problems that you're trying to address. And so this process is about doing that and teaching and teaching people who are your next generation how to solve problems together. You can't be a hero. It has to be a team. Has to be a team, absolutely. I think too, sometimes you see people hire a consultant, you know, and, and they may not needing, you know, they don't think they need a workbook or any kind of real help to just have a consultant come in. Can you talk a little bit about the difference between that model versus them hiring, you know, or just buying your book and really implementing that as, as a team um working through this together? I understand that in organizational change. There is a risk for the internal. Adviser To be, to have a career jeopardy by the fact that they're making changes that some people may not like. And Outside people are expendable. Internal people are not. So what happens along the way is if you don't bring in somebody from the outside who is expendable, who's not there for the job, but to get something done and deal with the conflicts that show up in the resistance, you're going to have any initiative's going to fall apart. So that's why an outside, an outsider coming in is important. The role of the of the advisor is is different as well, because now you're coaching people, you're coaching leaders, you're not directing them. A lot of consultants that I see come in, come in with the idea of his, his For example, there's a group that's doing traction, and traction seems to be an important process uh with the tools and stuff like that, and not everybody buys into that. So, if they don't buy into it, what do you do? And so they bring in these outsiders who have an agenda, as I would do, and that is to solve the problem. And the problem is management needs A vision And if the management doesn't provide a vision, solving the problems won't work. And so what the challenge this workbook talks about vision. Innovation is about positive change. It's about doing things differently. It's about disrupting the marketplace. The only way you can do this is can't come from the president of the company. It's got to go from the bottom up because they're closer to the customer than the president. So you try to engage the people below. To solve that problem. And so that's why we did the problem solving capabilities. It's two chapters because it's so important to know how to solve a problem. What are the techniques that have been going on for years, that are used by major corporations. This, this process is no different than the changes, change program back in the 80s and 90s. It's still going on today. Companies going to change. Now, I think that's, I think that's really important. And I know there's a lot of companies just don't, um, probably don't take this as serious as it needs to be taken. Um, um, but when you get into the problems that create are created, um, by not actually addressing this type of organizational change, um, then you're kind of reacting to it now, like, let's figure it out and fix it. And, um, certainly better off to do it way early on in the process, whether you're an ESOP or you're gonna be an ESOP in a, in a few years to get started. If you are um a business owner or you're working through this implementing this project, Jack, how would you, how would they actually use your work, work, workbook to go through this process specifically? Well, the key is to assign the responsibility to somebody below the president. OK, and it should be a senior manager. OK, and that person should have read the book. And is now training somebody to do, to train others. And the reason why I say below the president is the president should have read the book. And he or she should be supporting it. But it requires the next generation, the, you know, because you're the owner. If you're the owner, Phil, you should have read the book. And you've assigned it to me, whoever I am. or, or to your, to your right-hand person and say, look, you got a if you don't buy into this, let let me know, but we need to improve the company. We need to develop your leadership and your team with my support. Or you're, you're saying this to your second generation guy and saying, I'm, you're here to Bill is here to help the the right-hand person go through this process. And that person, that person is hiring. or promoting somebody to be the trainer of this change process. And the, the challenge you have as the owner is stepping in and telling them what to do, rather than sitting back and watching them go through this very painful experience. And once they get through the experience with your support, They're they're now ready to take over because you learned. By uh the role of hard knocks, the rule of hard knocks, you know, making mistakes, not reading a book in advance, not following a process that everybody else has tried that works. Uh, you know, you're not doing that. So with a book, you're now doing it and you're now developing others as a tool to develop the next generation. Uh, typically right now, there's a problem where we call the hourglass. We've got these senior people at the at the top of the class that are going away. This management team is very narrow and there's not many in the middle, and then you have all these new people, young people coming in that have no clue. So how do you keep them problem solved? How do you teach them leadership? How do you teach them the rule of hard knocks that you have to go through mistakes in order to learn? Yeah. That's where this book brings it together. I would like to say that there's 4 elements of an ownership culture that I would like to throw in there. Uh, that's a little bit off, but it's important is there's 4 letters that I used to measure. ownership culture. One is that the P for producing results. If you can't produce results. You're not going to be, you're not going to get the job done. The company will dissolve. The second part is the company needs to administer a Administer the, the company, which means that while the sales guy wants to close a deal because he's got results orientation, it's the CFO that says that this company has bad receivables. We can't, we can't sell to this company. So there's an administrator, a counterbalance towards the results orientation. It's not about getting it done. It's about getting it done right. And then the next part is the entrepreneur, the risk-taking, the creativity, the innovation. That is very hard to do. If I were to come into your organization and fix it very quickly, I'd give you goals and give you rules. Because the goals, the people that are results oriented will follow, and the administrative, they will be the policies they'll enforce. In the meantime, we want you to create new ideas. We want you to be risk takers. That's not going to be so quick to do. So that takes a long term effect. And that's where the ownership culture comes in is that you have to have risk taking. And the other part is what they call integration, and that's about having people work well together. If you don't form teams, you're not going to integrate well. So Uh, that's how companies grow is by getting the young people to understand risk taking and follow the rules. The rules are there for a reason, right. So, um, no, those are very helpful. So practically speaking, once you have the safe senior manager that is going to take over and, and really charge forward, um, what's the very first step that they're gonna take in initiating the, um, the, the plan of the workbook? OK, we typically do a survey of the employees, and the reason for it is that we're trying to measure the culture under PAEI. And we want to know if the organization is producing results and what results are they producing. So a survey says, uh we are growing beyond our facilities. Uh, we're, we were getting along versus getting things done. Um, we are optimistic. It's a one person show or you can go to the list goes on. There's 130 of them. And the idea is to describe the company and when you start initiating change, you want to know, did you also change the culture because the culture that's not working. Will work after you're done with this process and then after a year or two you'll you'll do the survey again to benchmark change. So the first thing I do is the survey and then the next part is have a management retreat. And identify the top 10 problems. And then from the top 10 problems, then you form teams that you use a workbook of some sort to teach people how to work in teams. And then you start implementing uh the first top 3, you start forming the teams and and guiding them. Now, you're the business owner, you should be working with 3 different leaders. For those 3 different Plan, uh, different action plans the problems. Yeah, so the CEO works with three different people that champion the problems. That's right. There's the champions and uh we call them leaders, team leaders. And um the the goal for them is to develop the people and the membership to solve the problems independently of the owner. So that's where the challenge comes in. Is the owner going to be control freak? We're going to let this happen. And that's where the outsider comes in, like myself, to sit there and help coach the kids while the owner sits there biting his nails or her nails. Sure. Yeah, cause it's hard to let go of control like that, you know, some personalities are different too, so I'd imagine. When you start off with, you know, the employee survey, what, what would you say that the reason is to start with the employee survey? We tell them we're trying to grow the company and we want to involve them in the process, so we want them we want their input as we begin the effort to create an ownership culture. I think that's the goal is the goal is to create create solve problems that increase customer value. Yeah, I think that's, that's, and the point there too, I think it really needs to be put out a little more emphasis is that you are creating a bottom-up approach or your, your approach is bottom up because otherwise you're not gonna get the buy-in from everybody. You're not creating culture. Um, I've seen it where the top leadership decides to change the organization, um, but it becomes this, you know, they're leading it and nobody really even understands what they're doing because they didn't really ask the questions that you probably are asking in that survey. Right. The other part that happens though is that there's a history of of of cultural issues. If you, if you're, if you, if you are running the company very tight fisted. Uh, you, you're not typically, you're not developing people to make decisions without you. And therefore the ceiling of the, you've built this company to be worth $10 million or whatever number it is. But the management team has been doing what you told them to do, and now you've got a problem because they're not, they don't have the ability. To manage this complex problem that you business, I call it a problem, but it's a business. And you haven't developed a team to work without you. Right. Yeah, sometimes they can't, the owner can't probably even see that. Like sometimes they're just blind to it and they're, they're seeing these problems erupt. Um, so sometimes I guess you're probably having to, to address it in a gentle way to say this is, this is something that you really have to take a look at. What, what sort of example of, of a problem that you would see come up um for the listener that says, you know, these are things that could come up in your organization that um need to be addressed in this, in this way that you're going about it. One is organizational communication. What's going on? People don't know what's going on below communicating. We get newsletters once a year or every quarter. We have this intranet. We have all this stuff, but we're not getting the information we'd like to get. That's typically one of them. Another one is you don't have a long range plan. Um, a long range plan is 15 years out, and you go why 15 years? Because, uh, the typical tenure of a CEO is 15 to 20 years. Um, so if you're building a tenure for the next generation, Um, they need to have the vision of what they're gonna do because the guy that guy or gal that got them to $10 million in sales isn't gonna be the same person to get them to 50 million. That's true. Yeah, 1515 years is tough for people, but I agree with you. I think that having a long-term vision is very important, um, whether you hit exactly that or not. Yeah, and, and, and part of the challenges is that uh That there's a study that was made years ago about the the leadership in in the success ratio of those people and how long it took. And the outcome of the study said this. The typical person that comes in as CEO, if they haven't been CEO before, it takes 8 years to get comfortable, between 5 and 8 years to get comfortable. And for those that get it less than 3 years, It's because they were there before. They've been in this thing before and and it takes 32 to 3 years for them to get comfortable, even when they got to see, you know, if they brought up from the outside. And the other study was. The success rate For an outsider coming in is 20 to 30%. That means pretty low, yeah, and, and so, and I can name a client that I had that brought it that spent money, brought in the headhunters, brought in everybody to bring in the outsider because they didn't have a guy from inside. And the owner said, oh my gosh, I made a mistake. I should have listened to you, Jack. I should have built my own team because now that my family is ready to take over and because it's, there's still an ESOP, 100% ESOP, but it's family, you know, managed. the outsiders screwed the company. Yeah, because they, because they came in under a different agenda. They didn't understand the culture. They weren't all that stuff was just thrown out the door to to for an initiative of growing profitability for bonuses. You know, and so, and so now. it's a different company and And the typical thing that happens is that if you bring in an outsider, you know that's a short-term event in order to groom, that person should come in and groom the next generation. And groom them so that they can, so in 3 or 5 years they're going to be out. If you bring in a 45 year old, don't bring him in as CEO, bring him in as something else, and I, you know, because it depends on the role with the understanding that if there's not a fit, you're out in a year and you're going to know in 6 months whether or not there's a cultural fit between that person and yourself. We all know those things. I mean, and we have that radar in us, we know that if you're not a good fit, it'll just be clear, but sometimes people don't act on that. If you go into the um the, the what you've seen it kind of is inherent when you're just talking about that how have your clients benefited from using this workbook? What have you actually seen in, in the um the work that you've done there? Alright, for example, I had a client, we went through this process. They didn't have a succession plan in place and the the CEO who was a form partial owner, they became a 100, 100% ESOP, and they were buying out the final tranche. And they didn't, they had 4 key managers, but none of them were ready to become CEO. So they brought me in with the understanding of building a succession plan, and we went through the, the, you know, the survey, we went through the retreat, we did all that stuff. In order to build out the process when, when I left, they were in the midst of solving the 2nd 2nd round of problems. And it ended up by the end of the 2nd year. Uh, their sales were declining. They had declined from around 50 million to 30 million and we're now back to 50 and growing. Yeah, so that, that's like when you see the, the quantitative effect of that, obviously, it's, it's um you see the results of it. So, you mentioned to me earlier that you also have another workbook and it's called the Sudden Death Checklist for Business Owners. What is the story behind that book? Well, it started with, excuse me, it started with uh Preparing the next generation. Dad's typically dad or mom's dad. And uh and if, if that should happen, what are you guys going to do to run the company? And Dad, what's your plan if you suddenly die tonight? What's the, what's the kids' plan to run the company while you're gone? And so that built, that started off in the 90s as the Lotus 123 spreadsheet and WordPro document that got converted to Excel and Word and is now a workbook. And what started off is about 5 or 10 pages is now 120 pages because it now covers the whole gamut from start to finish. Um, what needs to be done in preparation for the founder's death and and what to do after they die. Typically, if you own a business, Phil, and you die, the spouse becomes the owner. Your spouse now becomes the owner of the company. And they don't have a clue what to do. And you didn't, you didn't fill out any form of workbook that said, in the event of this happening, here's what you need from from my attorneys, and here's what you need to do to to to transition the company. Those things I never brought up and it takes somebody like myself to to step in and say, hey, here's a process, follow. Yeah, so that's, and that, and I see that too in our business as a CPA firm. I mean that, that question never gets answered really well, um, and it, it gives us another resource when you start thinking about your own planning. Um, it's a different avenue, but it's kind of connected to what we're talking about planning for your future. Um, Jack and I talked about doing another episode on that down the road, so maybe we'll, we'll get into it. So for today, for people that want to buy the Creating strategic innovation workbook, can find it by going to Amazon's website and search Jack Vale's fifth edition. Jack's last name is spelled V E A L E. For people who want the Sudden Death checklist, um, visit www.suddendeathhecklist.com. Um, Jack, you mentioned you have some special pricing for people who attended our program today. Um what is that? OK, so if you're interested in books, I have a discount for 10 or more, 5 or 10 or more. Uh, actually I prefer 10, but I'll take 5, depending on the company. If you buy 5 books and I, I will order them for you through Amazon at a different price level. Um. And then the other one is on Sunday Death checklist. If you go to the website, you'll see that there's a caregiver tab, and in that caregiver tab, there's a pricing for caregivers, which I, which you would be for your family. And so that that's we have a special price for that. Great. And also on, so on our website, journey to an ESOP.com, we'll put a a a URL URL link as well to Jack's site so you can get there easily from there to, to check out his book. Um, but for now, I just wanna say thank you, Jack, um, for your time and insight from, I think this topic that we talked about is really a critical area for any company that's thinking that they want to do any kind of ESOP and, and beyond that, you know, any, any company that's not thinking about ownership transition. Um, really should be because it's an essential part of business planning. Um, as we close out, I just want to remind you, um, if you like the podcast, please subscribe, share it with a friend, have a great day and we look forward to, uh, next time.