Owners: Are You Too Involved?

[00:00:06.480] - Dan Paulson

Hello.

[00:00:07.800] - Dan Paulson

And welcome to Books and the biz. We are back for another exciting episode. Mystery, intrigue, romance. Well, no romance. Lots of numbers, though. Financial, operational. Welcome back, Rich. How are you?

[00:00:23.230] - Rich Veltre

I am good. How are you?

[00:00:25.020] - Dan Paulson

I am wonderful. Recently, we finished a podcast talking about five questions that an owner should be asked or should be asking themselves when they're thinking of stepping back or stepping out. I wanted to expand on that. While we talked about the questions, we talked a little bit about what to look for in each of the questions. I think it's now good for maybe the next couple of episodes to break down different aspects of succession pitfalls roadblocks, how to overcome them. What that led me to is talking today about the owner, because the owner is the primary link in all this. And I think you probably have a couple of examples, I know I do, of where maybe the owner wasn't ready to step back, even though they wanted to. And I mean, it seems to me that when you're in charge of your own business, it's very hard to let go. I'll give you an example. So I was working with the company once, owner wanted to retire within five years. Perfect. Plenty of time to work on the situation and get him to step out. The problem was he wouldn't give up any control.

[00:01:40.360] - Dan Paulson

He was the center of advice. Everyone came to him, and there was just no way to get him to let go of that. So it took a lot of time to break down what he should be doing versus what he was doing, because he felt he need to get his hands into everything still. And I kept explaining to him, if you're going to control everything, it's going to be very hard for you to step back because the people are now relying on you for the answers.

[00:02:08.820] - Rich Veltre

Yeah, I have several examples of exactly the same thing where the business becomes a very big part of the founder/owner, becomes a big part of their day to day. And a lot of times they'll even go home at night and it's still business, business, business. It's still what happened today and they're just entrenched. It becomes difficult when you start talking about succession or changes or even just day-to-day adjustments while you're in the business, let alone what's going to happen when you get to the point where you want to be out of the business.

[00:02:47.690] - Dan Paulson

They want to change everything except what they're doing, is what I find.

[00:02:53.310] - Rich Veltre

That's a good one. Yeah. It becomes very difficult, too, because they become so used to everything that they're doing being what they consider to be correct. It almost starts to build up a wall. When you come in and say, Oh, I've seen this other company who has done this and that would be so much better if you did it that way. Then they're like, No, what's going on here works for me.

[00:03:23.920] - Dan Paulson

It's easy when it works for them. It's hard when you're asking now an employee to step up, and that employee maybe goes out on a limb and actually does try to do something different from what the owner would typically do. Then the owner comes crashing in and says, No, that's not right. You can't do it that way. Then they walk back to their desk with their tail tucked between their legs, and they shall never stick their neck out again because the owner doesn't agree with what they're doing. It's so hard to get people to really take on ownership, and this is what they all want. They want typically people from inside to start taking on a greater role and ultimately maybe getting to a point where they're buying them out. It's always easier the person in the office who knows everything that's going on and can run the company, it's easier to hand it off to them and get a guaranteed payday versus putting it out on the market and trying to find somebody else. Because it's root with problems when you got to put your business on the open market. There's costs involved. There's valuations that most owners never agree with because they don't understand how the valuation impacts their business or what they've done in the past that causes that valuation to be much, much less than what they expect.

[00:04:47.410] - Rich Veltre

Right. And we talked about that in one of our other conversations where sometimes it's more valuable to the person that's already inside as opposed to the newcomer who might look at things very differently or come in as a financial buyer as opposed to a strategic buyer. So there's a lot of value that could be in keeping it with the people inside and building, like you said, building the people underneath you to come up and be the next you. Yeah.

[00:05:20.050] - Dan Paulson

On the operations side, to me, that's the biggest cost they run into. It's also, especially as the employees start knowing that the owner is looking to step away, when they don't see any changes that allow them to take on greater responsibilities, greater leadership, greater accountability, that's when they start walking, because now they see the writing on the wall. Well, if the boss isn't going to be here and nothing's going to change, this is going to become a crapshow really quick. If I'm a good employee, I'm starting to look at my options out where maybe some of the other ones are not. Now from a cost side for me, on the operations end is you start seeing employee turnover or you start seeing less engagement from key individuals because they don't believe that the owner is going to be able to step back or let go like they want to. When it comes down to a situation where now they've got to take control and they've got to step up and work has to change, they're not allowed to do that.

[00:06:27.150] - Rich Veltre

Yeah. Like you said, that has a cost impact as well. If you are going out and basically saying, I have to find somebody to replace that owner, and we talked about that as well in a different episode and different conversation where these have valuation impacts, where if the owner was doing something a certain way, but to hire someone else to do that same work, it's going to cost more, valuation people take adjustment for that. They really do make an adjustment for what's it going to cost me to put a new leader in there, or what's it going to cost? What do I want to make if I have to take that leader's position?

[00:07:03.280] - Dan Paulson

How do you think that impacts the overall valuation? Let's say it's a $10 million company. Owner is ingrained in everything. He's thinking, Well, this is worth... We'll just make it simple, one time multiple. It's worth $10 million. Then you come in and you look at what, and then what does that lead to as far as how the valuation might change?

[00:07:32.150] - Rich Veltre

Yeah, well, most people doing that due diligence are going to come in and they're going to look at the bottom line. What's that $10 million actually earning? Then they're going to look at what is the owner paying himself. A lot of times you'll find, I think we saw statistics on this, that the owner is actually paying themselves less than some of their highest paid employees. Then also that means that they're probably paying themselves less than what the market would pay for that position. The problem is the buyer is going to look at it from, I need to replace this person. If I do that, it's going to cost me more money. They will decrease the bottom line. If you're saying you're making a million dollars on that 10 million dollars of revenue, they're going to look at it and say, Well, you're not really making a million dollars on it. You're making half a million dollars on it, assuming a very large change in what the market value of the CEO or owner is versus what they're actually paying. They'll take it from the market position, not from the owner position. That's going to lower the net income, which lowers the overall multiple.

[00:08:45.210] - Rich Veltre

Well, the multiple stays the same, but the multiple times the net income that they're assuming goes down. Exactly. Overall, their offer price will go down.

[00:08:54.090] - Rich Veltre

So.

[00:08:54.910] - Rich Veltre

It's a significant hurdle that people don't necessarily think is coming.

[00:08:59.420] - Dan Paulson

And what I see when you're talking about positions, a president of a small company, five to $10 million, you're probably looking at paying that person roughly 250k a year plus benefits, plus incentives. I mean, you name it, that total comp for that person might be pushing half a million dollars before you realize it. And that's just the president. Now you implement VP of operations or a COO, not all that much different there, $150,000, $200,000 benefits, all that stuff. And your core leadership team could easily cost a million dollars or more in salary and benefits in just a year. I mean, what is your position? If you were going to fill a CFO position, you probably know this better than anyone, internally, that position is going to be worth what? As far as salary?

[00:10:01.960] - Rich Veltre

That's got to be a full-time CFO with benefits baked in. It's got to be 250 base plus probably another 20% on top of that between benefits and taxes on top. That's another 50. It's a $300,000 position for that full-time, high-level person. If you don't have that person and they feel like it's important to actually have that covered, they're going to figure that in somehow.

[00:10:32.610] - Dan Paulson

There is a real cost that many of these owners need to be aware of when it comes to replacing who they are in the company. That cost ideally should start 3-5 years in advance of them wanting to sell out because ultimately, again, that affects the valuation. They might look at it as an unneeded expense because, of course, they're running everything. If they're running everything, why do they need these people in there? Well, the reason you need those people is because eventually you're not going to be running everything and somebody else will be. So when it comes to really getting them to to look at the picture and step back, in my opinion, they need to first look internally at themselves. What I often run into, I alluded to it when we started the podcast, is they are the center of all knowledge. I call them the oracles, because there's a line out their door of people with all sorts of problems and/or challenges that they're coming in to ask questions of the owner. Even if they know the answer to it, they're looking for the blessing of the owner to give them permission to do what they believe needs to be done or give them direction.

[00:11:40.050] - Dan Paulson

Well, from an operations side, that's a complete nightmare because one, the owner never goes away. If they go on vacation, they have their phone and they have their laptop and they're constantly checking in, or they're constantly getting interrupted and called. But overall, it's very difficult for them to relinquish control them, because there's a sense of purpose when people are coming to your door and when they're asking you questions, you feel valued, you feel good. And this is where I think a lot of owners get stuck, is they're always looking for that dopamine hit when Joe Bob walks in and says, hey, I'm having a problem with this, and you can provide a very quick solution to him. But here's the problem. Joe Bob now hasn't learned how to solve the problem. So guess what happens the next time that same problem reoccurs? He's knocking on your door and he's asking you that question all over again. I've even heard owners talk about, I'm really tired of answering this question. It seems like every time I tell them, they come back and they still ask it again. And that all comes from, again, that risk versus reward.

[00:12:46.460] - Dan Paulson

Employees aren't going to stick their neck out if they know the boss is going to have a different idea or they're always going to look for the boss's approval. Path of least resistance kicks in because if the boss is going to tell me what to do, why should I use my gray matter to solve the issue?

[00:13:02.070] - Rich Veltre

Right. I had the same issue with a company that I went into that probably had 20 employees, and we were working through and trying to figure out some procedures and move things around and everything I asked that basically became, Well, let's go ask Joe. Joe was the CEO. So it became, Well, we need to go ask Joe. Well, when the company grew and it was a global company, they needed somebody to actually push the global side of it. And the CEO went, was working out of Australia. They couldn't ask Joe as much because Joe was on a 12 hour different time zone. So people working at eight o'clock, it was eight o'clock at night for Joe. So it started to solve itself. But I just found it interesting that there were 15, 20 people that were constantly saying, well, we just have to wait until Joe tells us what to do. So we finally said, There's no way to wait because Joe is not going to get back to you in time and we need an answer now.

[00:13:58.540] - Dan Paulson

Joe must have valued his because I remember working overseas and I stayed up late.

[00:14:07.150] - Rich Veltre

Yeah. I mean, look, he definitely was one of those guys that was the founder that we're talking about. He was going to take as many phone calls as possible. But if you're going to grow a global company and you're going to get to the point where eventually someone wants to buy you, then you have to set the company culture. You have to set the policy that you guys are being paid to make the decision, make the decision.

[00:14:32.830] - Dan Paulson

And step back. And step back. Even if the decision isn't the one you would have made, even if the decision turns out to be the wrong decision. And this is the hard part, because sometimes you need to let people fall and scrape their knees. If you're unwilling to do that, they're never going to learn because we learn through our mistakes, not through our achievements.

[00:14:54.590] - Rich Veltre

Through the points that we're talking about, if you don't let them scrape their knees and you're going to take everything in there, when the valuation goes down later, you have nobody else to hold off on that. There's nobody else to blame for that. Your valuation is going to go down because you don't have the infrastructure set up the way that a new buyer would want to see it.

[00:15:15.970] - Dan Paulson

Exactly. That goes back to, again, repurposing yourself. I brought up earlier, everyone has a purpose. Everyone wants to feel good, like they feel needed, they feel like they belong. When you're stepping out of the company, your purpose is changing. I don't think many owners realize that, nor do they plan for what's next after work. I hear from a number of owners, Well, I'm going to golf every day. You are. Really, you are. You're going to golf every day of the week, put in 36 to 72 holes, and you think this is going to be fun. Talk to me 30 days into that, and let's see how excited you are about golfing every day, because I don't know about you, but after 18 holes, I get fairly tired. Doing that seven days a week doesn't seem too appealing to me, and I enjoy golf.

[00:16:14.810] - Dan Paulson

But.

[00:16:15.480] - Dan Paulson

So you really have to figure out what you're going to do with your time. Otherwise, what happens is you get re-engaged. I remember when I was still in the work-a-day world, I was working for a company, I was brought in, owner said, I want to step back. I don't want to do as much here. I want to buy my dream home. I want to be able to travel. I want to do the things that I want to do. I'm like, okay, great, we can work on that. Within about three years, I had got him exactly what he wanted. I got him... He got to build his dream home on his dream acreage. He got to step back in the business. He didn't have to worry about day to day operations. He didn't have to worry about being called or being bothered by anything. He could go anywhere and do whatever he wanted. There's one thing I missed, though. What was his new purpose? Because again, when you got the dream home, okay, are you going to sit in the dream home all day and stare at the walls and admire your achievements? No. Are you going to go out and do all your hobbies whenever you want?

[00:17:19.490] - Dan Paulson

Well, that again is fun for a while, and then ultimately, again, that gets tiring. And he re-engaged with the business. Everything it took me three years to put together, he very quickly began to undo because it wasn't the way he wanted to do things. By the time it was all said and done, and I finally said enough of this and left, we were basically back to where we started, three years or four years earlier at that point. You don't realize how much damage you can do until you do it. And that company, instead of continuing to grow, it completely ground to a halt. And it's shrunk since then. They're still in business, but it's much, much smaller than it used to be.

[00:18:03.640] - Rich Veltre

Wow. Yeah, I have an example also of another client that was the same way, never changed the policy. Everybody just followed the owner. And what they didn't realize was the owner was doing really bad financing deals on his equipment to keep the business alive and eventually wound up in bankruptcy. And all those people went, oh, where do we go? And then so did the founder, he lost his house. So there's definitely advantage to putting some planning and some brain power to understanding what you're trying to do, where your focus is, what you think your ultimate purpose is and goal is, and when you retire, what you're going to do, and essentially get to the point where you say, I can let go. They didn't do that and it was an ugly story at the end.

[00:18:54.880] - Dan Paulson

Then there's the next part of that. If you're going to let go, who are you going to let go to? If you're in charge and you need somebody else to be, who is that person? Is that person on your team? Does that person not exist in your company yet? What's your org structure going to be? We talked about, sometimes the owner is everything. He's the salesperson, he's the operations person, he's a finance person. He wears many hats, and many times it's going to take a multitude of people to fill those hats once he decides to step back. That to me is the next step after you find purpose is you need to look at your org structure and decide what that needs to be to continue the ongoing growth of the business. Without that happening, you're again stuck in the water. If you are experiencing high turnover, here's why you need to start asking some of these questions. Are you really letting go? Are you still actively involved? Are you trusting people to do their jobs? And most of the time I find that the answer is no on that. They just don't have the wherewithal or the trust in people, or they make blind hiring decisions and then throw everything in that person's basket without any mentoring or coaching and then wonder why it completely blows up within a matter of months or years.

[00:20:15.720] - Dan Paulson

There's lots that goes into when you transition power, why it takes three to five years or better to actually make that goal happen.

[00:20:24.680] - Rich Veltre

Right. Well, Steve Jobs didn't give power away without a long succession set up. Tim Cook, I think, was in that COO position being groomed for years.

[00:20:40.930] - Dan Paulson

Yes. And this is even after he knew all his health issues. So he was more motivated, I think, because he knew there was an end date to his ability to run the company. A lot of owners make assumptions that they will live forever. Even though they know that's not factually true, they continue to move around their life like they're invincible. We touched base on this on one of the other episodes where we talked about natural disasters and also the unnatural disasters is what happens if something happens to you. Does the company go on or does it come to a grinding halt? You need to factor all those things in when you are looking at succession, because back to some of your points about financial, if you don't have things in place, the financial value your company dramatically decreases. I believe for most people, when they start a business, when they get it up and running, and when they get it successful, this becomes their retirement package. They put a lot of money back into the business. They, of course, take a lot of money and resources out of the business to support their lifestyle. But ultimately, they're looking at this company to be their retirement fund.

[00:21:53.830] - Dan Paulson

If you can't pull that off, and especially if you're gone and now this is the expectation for family members, your spouse, your kids, if you don't have those things in place, it's going to be very hard to pass that torch and make sure your family is taken care of.

[00:22:10.950] - Rich Veltre

Absolutely. Again, start early. Start early. You don't want to because you don't want to believe that it's going to affect you. But one day or another it's going to affect you. So you have to start thinking about it at least a small amount in your brain. Let it rattle around a little bit and come with something that you can actually put to paper.

[00:22:32.880] - Dan Paulson

Exactly. So what's your take away from all this, Rich?

[00:22:37.760] - Rich Veltre

I think I just said it. My biggest takeaway is start as early as you can to decide what is it that you want to get out of this. You do have to get yourself out a little bit of the day to day, mundane, repeating thing that you do all the time. It can be very gratifying. It'd be a wonderful life to be able to do all that. But somewhere along the line, we know it's going to end. Just for whatever reason, it's going to come to a point where you have to have the ability to go into something else. It could be golf, it could be hobby, as you said, it could be all these things. But you really want to plan for that, understand what that balance becomes, and understand how you have to get there. Because somewhere along the line, you have to exit from the business and be able to do those things. Trying to do that in nine months because you put your foot down on January first and say, By September, I have to be out of here, it's unrealistic, and you're probably going to get a really bad surprise on the way out.

[00:23:38.510] - Dan Paulson

Very bad surprise.

[00:23:39.900] - Rich Veltre

Yes.

[00:23:40.560] - Dan Paulson

For me, similar to what you're talking about, start early, but for me, it's really get help. As much as I would like to tell you, companies or owners that you can quit cold turkey, you can just drop it, let everything go, there's a very small percentage that can do that, will do that, or know what to do to make sure that happens. You're really a shameless plug here for us. This is really a time when you need to find some outside resources to come in and be that third party, be the neutral person to look at what's going on and help you figure out how you step back and still maintain the company on a growth trajectory. Because if you don't do that, if you try to do it yourself, I know what's going to happen because I've seen it time and time again. And usually that's when I get bright in any way is, this is now the third time I've tried to step back and now the clock is really ticking and I need to get out of here and I don't know what to do. So that to me is my biggest takeaway, get help when you need it.

[00:24:52.600] - Dan Paulson

Take time because it's going to take time. And it really requires a third party to come in and work you through that. Rich, should they actually take our advice and listen to this and actually want to get a hold of us? How would they get a hold of you?

[00:25:08.430] - Rich Veltre

The best way to reach out to me is my email address at rveltre@veltregroup.com.

[00:25:14.090] - Dan Paulson

And you can get a hold of me at danpaulsonletsgo.com. You can watch other podcasts like this or listen to other podcasts like this if you go to booksnbiz.com, B-O-O-K-S, the letter N, B-I-Z. Com, and you can check in on all the other wonderful things that we've been talking about over the past several weeks. It's hard to believe we're on, I think, about episode 16 or 17 at this point. So things are rocking along and we will continue to talk more about succession in the upcoming episodes. Rich, thanks for time and we will talk to you again next week.

[00:25:45.900] - Rich Veltre

The same with you.

[00:25:47.450] - Dan Paulson

Take care.

[00:25:48.330] - Rich Veltre

All right, take care.