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From Paul Spencer of Second Nature Solutions, a conversation about the complexities and nuances of building resilient family enterprises, especially in the face of economic and political uncertainties that loom on the horizon. See more at secondnature.solutions.
Welcome to Resilience Talk hosted by
Paul Spencer of Second Nature Solutions.
Let's dive in.
Well, here we are.
We're on the last one, number
eight, number eight of the key
evaluators that we've been talking
about within the ownership series.
And just as a quick review, we have
financial performance, we have growth
potential, key dependencies, recurring
revenue, right to win, corporate
structure, key management and leadership.
And then finally, what we're
gonna talk about today.
Owner involvement.
Now, when we're talking about
ownership, we're talking about
creating an asset, owning an asset.
And I know we've said this over and over
again, but it's really important to have
the lens that you business is an asset.
So when we think about our
family, family's on one side and
our business is on the other.
The business is temporary.
Family is forever.
You've heard me say that before.
Family is forever.
The business is temporary, but
the business is also an asset.
And so at some point in time I do not
have the capability to run and own
the business either because of health,
because, uh, what we'll talk about, I get
bored, or just because I'm getting older.
And I have hopefully those around
me to succeed and run the business
or I'm going to sell the business.
And so at any point in time, from
beginning the business to wherever
that decision has to be made or is
made, um, you want to be fueling.
The value of your company, of the
business that you've spent so much
time, so much effort, so much money into
building, and it's a joy of your life.
Hopefully it's a big accomplishment.
Hopefully it's something that
you're delighted to share and, um,
something that you're proud to have
created and potentially maybe even
a legacy that you have instilled
within, not just within yourself.
Or your family members, but also within
your employees and their families.
Alright, so when we're the owner, that's
the mentality that we have and that
we would want to have as the owner.
And the question that's gonna be asked
as a potential buyer is how does the
business perform without the owner?
So how does the business run without you?
Is the business operating with a
management team, with an executive
team, or is the owner involved in
all aspects of decision making?
Now, you've all been there before where,
um, at certain points of the business,
and sometimes, I know we've talked about
this already, but sometimes that's 10,
15 years in to owning the business.
You're still very much
heavily involved with.
All aspects of decision making.
All things come through you and
all approvals go through you.
And if um, some of those decisions skip
you or don't make it to your desk and
are made and they go poorly, you make it
known that all things come through me.
So there is a time for
some of those things.
Uh, there might be a per certain time
in your business where that makes sense.
There might be certain, uh, specific
decisions that make sense in that way,
but, uh, you're watering down the value.
Of your asset.
And really when you get towards the end
of making the decisions to, to sell,
the buyer's going to reduce a lot of
value from your business if you are
the only one who knows how to run it,
who knows how to make the decisions.
So we're gonna talk
about a few things here.
Um, another, another question is
around the worth of your business.
So.
This is just another phrase.
I'm just gonna read this.
The business is only worth what it
can make without the owner, right?
So if, uh, if you're not available
for one week, can the business run?
What
about a month?
What about one year?
What about three years?
Right.
It gets a little more difficult when
we get to the, the one week for sure.
I take one week off.
Well, do you, are you still
involved with decision making?
Are you still checking emails?
Are you still responding and
replying to customers during that
week when you're on vacation?
What about that month?
I would, I would bet a good portion of
you have not taken a month, a solid month,
four straight weeks off, um, as an owner.
Then you probably can't even visualize
or conceptualize what it would
look like to take off a full year.
And you may not want to, and that's okay
because you love running the business.
You love what you do, um,
you love being involved.
Um, but again, that's,
that's a distinction.
The distinction is can your
business work run without you?
Right.
Can it run, can it make those decisions
on its own without you around?
Um, so here might be some
scenarios you want to think of.
So, and these, these are things
that I've seen many, many times,
uh, working with all of you.
So there is no management.
What does that mean?
That means maybe you're a $3 million
business, but the owner does everything.
Maybe you're a 5, 6, 7, $8
million business and all
decisions flow through you, right?
There's no, when I say there's no
management, this is that scenario.
The no management scenario, and what that
means is there's no second in command.
There's, there's nobody that
you've delegated and empowered
to make decisions on your behalf.
And in this, in this scenario,
employers, employees tend to be
order takers, not decision makers.
So you've, you've essentially trained
them through your culture, um,
with, uh, with no management that.
In order for me to decide on what to
do with this particular customer or
this particular project that I need
to go through you as the owner, and so
employees learn that fairly quickly.
They're very, very quick to learn that.
There's no point on me trying
to decide, and there's no point
on me trying to figure this out.
I'll just go talk to Paul, and
Paul will tell me what to do.
And that's a, that's an
order taker, um, mentality.
And, uh, and maybe sometimes, especially
when you get down to the lower side
of the business, meaning the revenue.
So we're in this, um, as
if you're a startup, right?
You're in this 800 K to 1.5
million and even probably,
maybe even up to 5 million.
The owner is working 70, 80,
maybe even a hundred hours a week.
And, um.
That lives in the no management realm.
There may be some of you that are
owning and running a $12 million
business and spending a significant
amount of time at work or on the work.
Now, it doesn't mean that you can't
enjoy the 70 hours and work a lot of
hours towards your business, but if
you are there because the business will
not perform a run without you there.
That's a, that's a, um,
a red flag for a buyer.
So here's another scenario.
Weak management.
So the weak management scenario, right?
This is where the owner, um,
is play basically playing three
different executive roles.
They're the CEO, they're
the, the operations person.
There's, they're the
sales director, right?
Um, and you st you may have hired.
Uh, uh, what we would call a number two,
uh, for some of you call it a gm, um,
others would call it a president or some
of you don't want to hire a president
or a gm, so you call them the vp and
there's not really a term after the vp.
They just give them the vp.
Um, and so you may have hired somebody
and they've been there for a year or two
or three, but the owner is still deeply
involved and the owner is still deeply.
Um, directing, uh, that,
that, uh, number two.
Um, so even the number two starts to
learn that, oh, I gotta talk to Paul
and before I go ahead and make any
moves, I'm gonna get Paul's blessing.
Right?
Um, some of those things are
okay, meaning you wanna, you wanna
confirm and inform, um, but if the
number two doesn't feel like he's.
Or she is empowered or encouraged
to take ownership of some aspects,
then you have weak management.
Um, and another part of this
too, is you start to see that
key customer relationships are
directly tied to the owner.
The owner built the relationship.
The owner has known the, the
customer for a really long time.
They may even be good friends
and they just have this type
of a relationship that, um, the
owner may not even wanna give up.
Um, could be because they're
friends, but most of the time it's
because they're afraid that if they
give it to the number two, that.
They'll mess something up and I
will lose that key customer that
I've had for 10, 15 years, right?
And so there's a lot of fear, um, and
a lot of, a lot of white knuckling.
So holding on tight, keeping the knuckles
nice and white and not letting go.
Um, another part of week
management is there's no real
documented succession plan.
So may have hired the number two, but
even if you talk to the number two, he, he
or she doesn't really know what the path
looks like when they're gonna start taking
o over different aspects of the business.
When the, uh, owner is gonna start, uh,
reducing their own responsibilities,
none of that is in place.
So, uh, the third one
is strong management.
That's the strong management scenario.
And here we've, um, we've got
a business where we have some
tenure in the management team.
And you can call it the executive team,
but this is where we've got a, we've
got A-A-C-F-O or we've got A-A-A-C-O-O.
And really you don't need to
have the, the C terms, right?
We've got a, we've got a director of
finance, we've got a operations manager,
we have a, we have a VP of sales.
Um, and you don't even need to have those
particular ones, but you've got a team of.
Three, maybe four people,
including the owner.
So that four or five, uh, group that,
that basically forms the executive team.
And you have tenure within there.
So you may have 10 years with a,
with a particular, uh, person,
maybe five or six with another,
maybe three or four with another.
And, uh, where we're, what we're
looking at is we have some knowledge.
Because we've got some tenure,
we've got some new ideas because
some are, are a little new to the
business and they form a team.
But at any point in time, if the owner
steps aside or if we go back to, takes
a month off, um, we're very confident
that the, that those three or four can
run the business without the owner.
They can make decisions.
They may not know all the ins and outs and
history of things, and they may not make
the same decision you would as the owner.
They're fully capable
of running the business.
And in that month, when you get
back on week five, the business
is not gonna be outta business.
You're not going bankrupt.
Right.
And at this point in time, because
you have an executive team.
It's almost outta necessity that you
have to start documenting your processes.
Um, only because in order for
those things to work, um, you have
to start communicating better.
And that typically lives
in different processes.
And now you're starting
to have a strong bench.
Um.
Underneath those executives who
they're mentoring with and they're
documenting processes, maybe even putting
succession plans in for themselves.
And that's starting to
create a structure, right?
When we're talking about, uh, key
management and key leadership last
week, this is that structure that
really creates some asset value, a
real high asset value for yourself.
Um.
And, uh, so then when we're going
to have a couple more things I
wanna talk about, which is, uh, what
I just call the buyer's delight.
So when, when the buyer walks into your
house and sees that it's clean, um,
that it's bright, that, um, it's well
kept, and they can tell that not only
is it well kept, but it's been well
maintained and the furnace looks clean.
And how old is this furnace?
Well, uh, it's, it's six, seven years old.
Wow.
It looks like it's brand new, right?
Uh, the appliances are nice, or maybe the,
the appliances are replaced because we
value, um, having a nice house and a nice
home, even if we're not selling it right.
That's a buyer's delight.
They walk in, they're like,
oh, I love this place.
I love it.
I wanna, I'm willing to pay.
For this home.
So that's the buyer's delight.
And so some of these, some of these
tests, I always call them tests, but
from a, from a buyer's perspective,
uh, if they get to hear that, the owner
says, you know, honestly, um, I'm bored.
The team basically runs everything.
Um, I've accomplished
what I want to accomplish.
Um, I've set the vision and
the vision has played out and.
Um, the team is actually much stronger
together, um, than anything that I can do.
And they're, they have way different
visions, different innovations, and
they're moving this company beyond what
I could have ever possibly dreamed.
That's buyer's delight, right?
Another part of, uh, the board test is
the owner's taking some time off, right?
They're taking six plus
weeks off annually.
Uh, have a client of mine.
We were going through that, um, and
just kind of reflecting and he's
like, you know, one of those years
we talked about sabbaticals and I
was able to take off 15 weeks, right?
16 weeks, I think One year.
Even got up to maybe 18 weeks.
Um, is he, uh, absent
from running the business?
No, not at all.
He owns the business.
He governs.
The business, but it, uh,
that's a different mindset
than running the business.
And, uh, and it's totally doable.
Um, and I'll tell you, I know I've,
I'm calling this the board test.
He's not bored.
He's loving it way more than when
he was running it, even though
he's skeptical that he could
govern the business and not run it.
So, uh, these things are possible.
And, um, and in the those cases, uh,
the owner is able to focus on key
strategic initiatives and to be able to
think and network and talk about these
things and move the company, um, 2, 3,
4 factors forward than they ever could
if they were in the daily operations.
Again, buyers delight.
So I already talked about this a little
bit, but long tenure and a deep bench.
So when you've got tenure inside
your, um, your management team,
your executive team, and tenure is
not always about 30, 20 plus years.
It's more in that sweet, sweet
spot, which is more like.
Eight to 12 years.
Um, even when you get to 15 years, that's
starting to get, um, a little too long.
Meaning, um, from a buyer's perspective,
if you've already been here for 15
years, I'm wondering, uh, if the,
when the owner leaves, when I buy, are
you going to step out because you've
been here so long and the the, um.
The change in leadership, or maybe
you're just ready to move on, right?
But if you're in that eight to 12 years,
um, I have more confidence that you're
gonna stick in it, um, with me as the
new owner and we're gonna go places.
Um, and then another one about
the deep bench is, um, you're
looking to have two or three.
Direct reports under each one of those
managers that you have an, that you
know that again, as the owner that
could step up and take those spots.
Do they have to?
No, but we're grooming them.
We're mentoring them.
We're training them, and we have
a nice deep bench long tenure
that is high value to a buyer.
So we've already talked about this,
documented and transferring knowledge.
That looks like.
What does that look like?
It looks like playbooks
ownership, o or not ownership.
Operation manuals, process documentation.
It doesn't mean a thick.
Big binder of 30 binders
on how to run the business.
But it is direction and it is
visual, and it is transparent.
Right?
And those are the playbooks on how the
business runs regardless of the people.
It, it establishes the roles,
establishes the processes within
the roles, and then establishes the
processes between the roles, the
interactions over the actions, as we say.
Right?
Um, there's likely a CRM.
That has detailed customer
history, very important.
Um, you have regular training
programs for new employees as part
of onboarding, but also as part of
ongoing training for all employees.
Um, that could be on the management
side, could be on the strategic
side, could be in the tactical
side of how we do the work and, um.
So when you have all of those
things, you know, the buyer
knows that you have systems over
people for critical functions.
And what does that mean?
That means I still value Paul as the
vp, but I know that behind Paul are
well documented processes and playbooks,
and that is how I know that this system
is going to run, meaning this business
is going to run regardless of Paul.
Not that I'm discounting Paul, but.
Again, I'm looking to mitigate my
risk as the buyer and as an owner
you should be doing the same thing.
It's very, very valid for you as well
as the owner that if Paul leaves and
we don't have those things documented,
those playbooks there, uh, then I
have valued Paul over my systems and
processes and we wanna reverse that.
Um, alright, so then the last thing
is leadership has skin in the game.
So again, buyer's delight knows
that I've got some long tenure.
I got a deep bench.
I've got an owner who's just
focused on strategic initiatives.
I've got documentations and
transfer knowledge in place.
I've got the playbooks, I
have systems over people.
Um, but now I have some of those key
employees that we talked about last week.
They also have some kind of profit
share May, they may even have equity.
Although I, I tend to, uh, try
to reduce the amount of equity
as owners as, as an advice.
Um, you built it, you put the sweat equity
in it, you, um, put your family into it.
Um, you took the risk,
you put the money in.
Um, keep as much equity as
you can, is my philosophy.
Um, but you can definitely get
through that with key employees,
with profit shares and different um.
Types of compensation plans for sure.
Um, there could be some retention
bonuses maybe that, that are built
into, uh, any kind of deal, um, as
far as a, a purchase or an m and a.
Um, and then the other thing too is
when leadership has skin in the game,
they're excited about new ownership.
Right?
Um, they don't see it
as a, as a bad thing.
They don't see it as a, as, um.
As something that's going to be a
detriment to them, either personally
or their careers or to the company.
They're excited because why?
Because we know how things are running.
We, we are excited about,
um, bringing somebody in.
And seeing what kind of ideas they
have and how they affect our systems
and processes and let's go forward.
There's so many fun things that involve
with, uh, new energy, new people,
um, within any kind of structure
that we have, either that's at the,
at the team level, at the management
or executive level, or even lives
up in the ownership level as well.
So anyway, this is the last.
Evaluator, um, it's the one that you
wanna be thinking about for yourself,
maybe even kinda recommend or encourage
you to think of it a little selfishly.
Um, and some of you do have a hard time
of thinking of it selfishly, but really
put it, put it into the frame of you.
What do you get out of, um.
Spending some time away
from, from the business.
What do you get by, um, bringing on one or
two new executives, mentoring and guiding
them and letting them run the business?
They'll make different decisions
that you ever would've made.
They'll make, uh, they'll
take the business in different
directions and let that be okay.
Of course, you govern and you keep them.
Uh, within some specific boundaries.
Um, but those are things that, uh,
for yourselves you can gain a lot
more understanding and, um, enjoyment
after of just owning a business.
Uh, it's a new level, it's an
elevation for you as an owner,
and I would encourage you to be
thinking of that sooner than later.
You can't, um, time.
Is fleeting time, can't get it back.
So the sooner you start it,
the better off you'll be.
And, uh, looking forward to hear
some comments from you guys.
Uh, I've already got some awesome feedback
from, uh, the different valuations.
A lot of people were responding
back on, the corporate structure.
A lot of things on right to win.
good conversations on that.
So always reach out to me, send
me an email, reach out on LinkedIn
and, We'll get back with you later.
Thank you.
Bye.