Succession Question 5: What Do You Want?

[00:00:07.500] - Dan Paulson

Hello.

[00:00:08.890] - Dan Paulson

And welcome back to Books and the biz. We are back here with Rich Veltre. Rich, how are you today?

[00:00:16.560] - Rich Veltre

I am great, Dan. How are you?

[00:00:19.340] - Dan Paulson

I am wonderful. If I was any better, I would be you.

[00:00:22.440] - Rich Veltre

I love it.

[00:00:27.200] - Dan Paulson

Well, I know somebody is getting towards the end of 2022 tax season. I know what you accounts go through with all the different updates and deadlines and whatnot. It seems like you spend the entire year doing taxes anymore.

[00:00:43.060] - Rich Veltre

Pretty much. I'm out of that side of it. So I'm happy about that. But yeah, we're almost done with the remainder of the 2022 issues are. So another couple of weeks and it'll all be over and we.

[00:00:59.960] - Rich Veltre

Look at the 2023. Yeah, I know. But even at the CFO level, they still managed to rope you back in a little bit.

[00:01:05.500] - Dan Paulson

And.

[00:01:06.970] - Dan Paulson

That's in some ways a good lead in here, because as you mentioned, you no longer do the taxide stuff anymore. You got out of that because you decided that's not what you wanted. And the fifth question in our five questions you need to ask yourself are, What do you want? And I will just bring up the graphic here so we can speak to that. Now, when we talked about the session ahead of time, there really isn't anything per se that we can do directly. I think there's questions that we help ask and where the value comes in for us to figuring out the answer to this is having a neutral third party come in and talk to you. But what I thought would be helpful to some of these people is, let's talk about the scenarios that we've dealt with where we're in the process of helping people figure out what they want. Because to me, that's the impact there is. I believe every business owner has some idea of what their next phase is, but they don't always know how to get there. So if you could maybe share some scenarios that you've experienced, I'll share some scenarios I've experienced, and hopefully that gives the listeners a little bit more idea maybe where they need to go or what they need to look at when they're starting to figure that out.

[00:02:35.880] - Rich Veltre

Yeah, I definitely have a number of examples, but I think two are a little bit more prevalent than others. One of them was actually a company that the owner was actually a private equity firm. But the private equity firm had watched as the investment that they made got put in jeopardy because they had made a gross error in the supply chain ability. The management that they put their trust in had basically made a mistake. They had owned a factory in China, which is no longer an available option, and they had imported all their goods from there and management came in and said, Well, we can make them for two dollars cheaper in the Dominican Republic. They started the process of getting them made in the Dominican Republic and shuttered the factory in China. But Dominican public wasn't ready yet. The problem was they stopped being able to get good shoes because the first batches of shoes that came out of Dominican Republic were faulty and they were getting sent back. So the whole wholesale distribution model was going down in flames because they were not able to replenish their product. And then when people came and said, we need these shoes, couldn't get them.

[00:03:57.860] - Rich Veltre

So private equity came up with, well, what do we want to do? So I added a word to your graphic, but what do we want to do? And they had to come up with the same scenario as if they were a founder or whether they were an owner. What do I want to do? I'm sure that was one of those days that we've talked about that they had a bad day and said, we just got to get out of here. This is horrible. But they wound up coming up with a strategy that took four years. So we go back to our timing. It took them four years to put in place a strategy where they corrected the error, turned the business around, went into a different direction. But the bet paid off and they wound up selling the company for a 12 multiple, which is a lot more than what most of us will ever be able to talk about. But the strategy was that impressive that they were able to turn around and sell it for that much more money. So they got their return back, even though it's a private equity firm. They don't usually hold on to companies for seven, eight years, but that's where they were on this one.

[00:05:03.660] - Dan Paulson

Yeah, that is a long time to be hanging on to an investment because usually it's closer to five years, isn't it?

[00:05:10.210] - Rich Veltre

I think, yeah, a lot of times, depending on the investment, I've heard some firms that go in for three years or even just a real short time frame because they have a plan that they figured out that if they buy it, they bring somebody else in, they put the two together inside of three years. It's a completely different company. So a lot of times the time frames are that short. Five is probably your right. Five is probably a good median there or a good maximum. But I have seen them with criteria to go even faster.

[00:05:44.300] - Dan Paulson

Yeah. Seems like we talk about five years a lot. All our episodes seem to link around five years. But yeah, I've had similar. So mine is actually with an individual business owner, built the company from scratch. So back 20 some years ago, he decided he was going to start this retail business. Actually, it started more or less as a food truck initially, and then it expanded into something completely different. But we talked in the beginning about the first stage of what he was doing. He thought he was going to be successful. He was, I think, in his late teens or something. He bought this truck and he was going to be making this product and it was going to be wonderful. He started out the first day and it was abysmal failure. And he was in one of those situations where we've talked about this in the past, you need capital to keep the investment going. Well, of course, he had spent all his money on the truck and the equipment and some basic training on how everything operates. And then he had nothing. He had to pretty much figure it out for himself. And that was the first stage of his his business.

[00:06:58.010] - Dan Paulson

And well, food truck changed to basically working in that industry building product and equipment and whatnot, and completely transferred to more of a manufacturing and retail space. So fast forward here 20 years, and he's getting burnt out. He's still relatively young. He has a family. He has a successful business, but he's stressed out and realizes what he's doing isn't working anymore. And the number one question I asked him as we were starting to work together was, what do you want? Which is why this question becomes so important, because while he had something in his mind, he didn't take the time to put it to paper or figure out all the details on how to get there. So we start with a very broad broad brush, if you will. We're flying at a very high view of what is it he's trying to create. And it's just basically to anchor on, well, I want to be able to step back in the business and have other people run it. Great. What do you have right now? Well, I have this many employees. I have this person doing this. I have this person doing that. I have this person who I want to fill in more of an operations role.

[00:08:17.050] - Dan Paulson

Well, great. You've got some of the building blocks in place. Well, why aren't we there now? And that's when you start working into the details, because now what you want from a very broad perspective now starts to get a little bit more focused and isolated. Well, the reasons he wasn't achieving the goals of being able to step back in his business is while he had people in place, some of those people were family members. He didn't know how to communicate with them without ruffling some feathers, because some of them were siblings. Well, Rich, I don't know if you have any brothers or sisters, but I will tell you, there are wonderful times in your family where you can agree on everything, and there are other times where you can't agree on anything. And then there are those times in the middle where everyone has their own opinion of what should be done, and they act on that and figure, Well, because you're my brother or sister, it doesn't matter if you don't agree with me, I'm just going to do it. Anyway, he had this situation where he had these family members that were basically dictating what was going on in their part of the business.

[00:09:24.660] - Dan Paulson

And the problem is it was somewhat working, but somewhat going against what he was trying to accomplish. So we had to start establishing from what he wanted. What did he want from his family members? And then from there, he had these other employees that he wanted to step up in the operations. Well, what did he want from them to get them to be more in the role that he was filling at that time so he could step back? And that process took the better part of a year to get figured out. But what we were able to do over that time is he was able to step back and get out of much of the day to day operation and put the responsibility on the people he wanted to. He was also able to clarify how each person stayed their own lane. So they all worked well together, and they all had autonomy in what they did. And there was very little interruption in how that went about. So there are ways to do this, and it all starts with answering these questions. And in his case, this is a situation where he wasn't actively looking to sell the company right now because he was one of those people that saw future opportunities scale, like we talked about last week where he saw the potential for growth and he wanted to focus more on that and less on the day to day operations.

[00:10:42.340] - Dan Paulson

So what we were able to do in his scenario was get him to a point where he could do that and spend time with his family. He has some young kids and he wanted to be closer to home. So that was the benefit in his world where we were able to really establish that.

[00:10:59.310] - Rich Veltre

Yeah, I have an example that goes right along with that. I'll jump in and tell you right now that I was very glad to hear you say that he took about a year, if I heard you right, right?

[00:11:11.130] - Dan Paulson

Yeah.

[00:11:11.900] - Rich Veltre

Okay. I had an example where we got a call that somebody wanted to sell their business and the fact of the matter was their financials were great. We've had a lot of conversations in these parts of our five-part series here that talked about the timeline. These guys had a company that was massively growing and it had grown to the point where it was a $100 million dollar company and it was privately owned. So the four owners had come to the conclusion that they wanted to get out. So they answered the question, What do you want? And they said, We want out. But the problem was exactly that. You still had to deal with the timeline. They were privately held. They had never done an audit. So now you had an investment banker because of the size of the transaction. You had an investment banker come in and said, Well, first thing we're looking for is audited financial statements. Then they said, Because of the size of the transaction, we think it would be beneficial to do a quality of earnings report from inside your company. You have your own speculation on your side of what the value should be and what your earnings are actually going to translate to on a buyer side.

[00:12:24.850] - Rich Veltre

Then they said, By the way, you're still going to have to do due diligence after all that's done. There's going to be legal back and forth and there's going to be a working capital review to see how much money you have to leave in the business. All of these things that we've been talking about all happened, and these owners had no idea what was involved in getting through this process. Then on top of that, you were selling to potentially one of these larger private equity firms who was interested in putting a lot of money in. The one thing that we saw when we walked in there was that they were getting financial reports two months after the month closed.

[00:13:02.270] - Rich Veltre

So.

[00:13:02.920] - Rich Veltre

We knew that there was a procedural issue. We weren't getting reports out. Private equity was not going to be happy with not getting data because they crave data.

[00:13:12.170] - Dan Paulson

Right.

[00:13:13.250] - Rich Veltre

So we had to go through that process. And that process alone, even though their financials were great, they got the number they were asking for. Their stories were fabulous for planting a seed on what somebody else can do, still took them a year to get through that process because they had to go through all of those steps and they were not ahead of that game.

[00:13:36.080] - Dan Paulson

And to me, there's sometimes that can take even longer because while we can sit here and say, well, what do you want? And I think both of you, I have worked with companies and helped them figure out that path forward. And like you said, it takes time. There's the other side of this where, okay, you know what you want. You're showing the path to get there. Then are you really willing to do the work to make it happen? We've shared some good examples here. I'm going to share an example of where the timeline got stretched much longer because essentially the owner knew what he wanted, but when it came down to doing the work, he didn't want to do that. It was a technology firm specialized business in basically the substation industry, so electrical side of things, and successful company, very good niche because he fit right in where there wasn't a ton of competition. There were some other competitors, but for the most part, he had the market share of the business. The problem was he was the oracle. You probably remember me talking about this some other times too, is where you have that one person who is the know it all, answer all type of individual, and everything went through this person.

[00:15:00.930] - Dan Paulson

Well, it went through this person to the point where they got backlogged, they couldn't get their stuff done, and it was very difficult for them to step back. And that's the hardest part about all of this is you can say what you want, but in the end, you have to be willing to let go of the things you're doing to fulfill the duties of another person in your organization. Otherwise, you're never going to get to the point where you can step back. Instead of a year, now we're talking about three to four years into this. And it also bled into the workplace culture because there were certain actions he was doing that he knew were destructive from a cultural standpoint, but he continued to do them. And then he wondered why other people followed suit. And I always tell you that the people will follow the actions of the owner. So if the owner is on top of things, they're structured, they follow through on their commitments, they get things done, they hold people accountable, you will start seeing the employees and the leadership team do the same. The exact opposite is also true, where if the owner says one thing does another, the employees will follow suit their as well.

[00:16:16.010] - Dan Paulson

They'll agree, they'll nod, they'll smile, and in the end, they'll continue doing the same destructive habits that the owner does. This is why it's really important to be clear on that whole what you want scenario, and also why this was question number five on the list of five, not number one, because we talked about a lot of things in the previous four episodes of why they're all important. To me, you can't answer this question until you have an idea of what's going on with the other four questions.

[00:16:46.040] - Rich Veltre

I can absolutely agree with that. I mean, you really do wind up looking at what are the past results? What does that translate to as far as the value goes, what do you want? I mean, add into it also the pieces that you said that in previous conversations we talked about, add to what do you want to do? What do you want to do? Because not only is it financial, not only is it operational, but it's what are you going to do when you're not here? You had mentioned that in another episode. So it becomes also translate that to what's the additional piece here? What do you want to do after the sale? So, yeah, you could pay one of those kids games, right? You take the question mark out and you add a couple of things. What do you want to do? What do you want from retirement? Blah, blah, blah. So you can add that to the end. I think it's all important. And yes, I do agree with you. I think you have to go through the first four and then you hit this fifth one and then it becomes, well, now you have to make a decision.

[00:17:51.260] - Dan Paulson

Yeah. You can't create a vacuum in anything. If you give up something, you have to fill that with something else. And that's what a lot of people don't realize. And this is true of your employees, it's true of anybody. If you create that vacuum, our minds go to where they got to fill it with something to do. They won't typically be latent like that because we're not wired that way, especially highly productive people. So it's always important to do that. Like I said, there's no grand plan or grand scheme here that either you or I could directly help with, where I think we both provide value is asking those questions and starting to provoke those thoughts after we've helped address all the other questions. That's where it really starts to crystallize what it is the owner wants to do with the rest of their time with the company and potentially the rest of their lives. So in that respect, if they needed to get hold of either you or I, I'll start with you first. How do they get a hold of you, Rich?

[00:18:57.340] - Rich Veltre

Best way is send me an email, rveltre@veltregroup. Com. Happy to talk about this subject because it's always coming up and it's a very popular topic at the moment.

[00:19:07.790] - Dan Paulson

And Dan? And same here. Well, they can get a hold of me at Danpaulsonlet'sgo.com. You can also check out our previous episodes related to these five questions if you go to booksnbiz.com. That's B-O-O-K-S, the letter N, B-I-Z. Com. And Rich, it's been fun talking about these scenarios. And I know in future episodes, we're going to continue to focus on succession and business transition and a number of other subjects. We might even put together our own top 10 lists of some of these to have a little bit of fun with it. That sounds good. But it's been good to get out this discussion and we hope people will take it to heart. And please, if you have any questions, feel free to reach out. So this has been Books in the biz, another episode down, and we will see you next week.

[00:19:54.960] - Rich Veltre

All right. Take care.