KEVIN O’FLAHERTY: Welcome to SeizeYourBusiness.com. My name is Kevin O’Flaherty from O’Flaherty Law, and I’m joined by my cohost Jim Waszak from Success Enhancement.
JIM WASZAK: Hello, everybody.
KEVIN O’FLAHERTY: And we have today two guests. We’ve got Ben Pohl and Ray Palys from CoreStrata Management Consulting. And our topic today – Jim, why don’t you rattle off the topic. You came up with it.
JIM WASZAK: Great value by removing the owner. Which is a little intriguing because a lot of smaller businesses the owner is the value. But by being continually involved and not creating the right processes and the right team, you really reduce your value. And our guests are going to speak to that today.
KEVIN O’FLAHERTY: Yeah. So, why don’t you guys tell us about yourselves and CoreStrata and what your experience is.
RAYMOND PALYS: Terrific. CoreStrata was founded by me in San Diego, California, 22 years ago, and we focus on the small to midsize business market typically, in the 5 million to 100 million in revenue range. One of the areas we’re focusing on in the Chicago area is succession planning, which our discussion falls under that broad umbrella of succession planning. And the idea is to, as Jim mentioned, to create value or increase the value of an organization without or with less direction oversight strategy and execution by a founder. That’s where the real value and attractiveness in business comes in. Now, of course you have to have a certain amount of people. If you have three people in your organization, it’s difficult to do that. But once you start getting in the million and a half, two million a year revenue, you usually have some pretty key people. And you can begin that process of structuring your organization to be less dependent on one owner.
JIM WASZAK: So where would you – I mean, we’ve seen this a lot where Mr. Entrepreneur starts a business, and he grows it to a certain level, yet he’s still got his hand in every decision. It’s sometimes hard for them to let go. How does that owner get to the mindset that he even wants to do this?
RAYMOND PALYS: If there’s pain. I think if there’s no pain in an organization, then an organization usually doesn’t change. But let’s go under the presumption that an owner would like to work less, would like to have more depth in his or her organization. And if that’s the case, then the starting point becomes strategic planning.
Most smaller companies, and I’ll say companies under 25 million a year in revenue, do not consistently employ a strategic planning process. Most of them will have something they call strategic planning, but it’s really in their minds. They sit down maybe once a quarter and they come up with the next quarter’s goals or maybe the next year’s goals. But again it’s driven by themselves. So, the starting point is you’re going through a formalized strategic planning process of which you’re including your key people. Maybe you’ve got six or eight people in an organization that you consider to be key people, and they become part of that process. So, they’re talking about the current situation. They’re talking about the future. They’re doing what we call a SWOT analysis (strengths, weakness opportunities, threats). And from that you’re developing a very specific road map or blueprint, if you will, of your short term being your one-year goals then your three- to five-year goals. And so that begins your process of including your routine in that process of planning.
JIM WASZAK: We find a lot of times our listeners like to hear case studies or stories. Can you give an example of a company that went through this process and what it looked like prior and what it looked like after?
RAYMOND PALYS: Absolutely. I can give a number of them, but we’ll start with one. A manufacturing company was a young owner in his early 30s, had 50 employees, did about I think around 12 million a year in revenue, and he brought us in because he was going to have a nervous breakdown. He didn’t have a college degree. Very smart man, knew the process of manufacturing, came up with a very innovative way to produce what he produced, but he didn’t understand how do you structure an organization. How do you create divisions? How do you create departments? How do you delegate? And so he was going to have a nervous breakdown as would any four of us if we had 50 people reporting to us, and we had to make those decisions.
So, fellow’s name was Bruce. We went in; we created an organizational structure, started coaching, and creating a leadership team. And with Bruce I said, “You know, Bruce.” I said, “We’ve got to mentor your new department heads on how you make decisions.” So for about two or three years every major decision that came up he would sit down one on one with that individual, and he would tell them the process of how he made decisions. We’ve all heard the adage, “Feed someone fish; you feed them for a day. Teach them to fish; and you feed them for life.”
So, it took about two or three years for the team to coalesce. Let’s fast forward 15 years. The company does about 75 million a year in revenue. There’s 170 employees. Bruce comes in about two hours a day. He operates as a true CEO. There’s a president now that runs the day-to-day operation. So, there is an example of when you start running your business the way we’re talking about in terms outside of the owner. This is where the growth becomes explosive, and I can give you numerous stories from different industries all around there, but that’s the process.
JIM WASZAK: I have to chuckle because you used that analogy about the fish. My wife likes to do that to me. She’s going to teach me how to fish. And I say, “No, no. I don’t want to know how to fish. Just give me the fish. Just give me the fish.” Doesn’t work.
RAYMOND PALYS: Yeah. Well, it’s quicker. And that’s a common thought. It’s easier to feed someone a meal than it is to teach them to fish. And this is where Jimmy talked about what are some of the obstacles or some of the reasons why owners don’t want to undertake this. The first one is they just don’t know. We all don’t know what we don’t know. We all heard that adage. Second is what kind of a process do you employ or do you put in to have that happen, which is a block. And then third, it’s just the time commitment to do that.
But if somebody has, again, a three- to five-year vision that looks at your organization, looks at the business, and says I want to be here less, or I want to be able to grow this faster than I can on my own. Because if you think about it, you’re leveraging. Let’s say you have five or six key people that are part of this management team that are involved in developing and executing strategy. You now have five more people that can possibly grow that business, and this is where the growth begins to accelerate.
There’s only so much that an individual can do. And we’ve all heard of the Peter principal, which is we all reach our level of incompetence. Sounds harsh, but that’s the reality. And this happens a lot to business owners who reach that ceiling of incompetence. And that’s why I mentioned earlier the pain. If there’s no pain, people generally don’t change. But when there’s pain, whether it’s time, a lack of time and one wants to spend more time with their family, that becomes a pain point. Or the profitability of the organization is not what it should be. That becomes a pain point. So, these are all pain points that determine whether or at what extent or what rate of change people are going to change.
JIM WASZAK: Maybe you can comment to this, or maybe even Kevin has a story. But what I’ve seen happen a few times is usually a man, entrepreneur founder, he’s working hard to build a business; he dies. Now, his widow gets stuck. She either has to sell the business at some loss, tries to run it, runs it into the ground. Not that it couldn’t be other, but it seems to me that if people had sort of a process that you described that would be much less of an issue.
RAYMOND PALYS: Oh, absolutely. Absolutely. Yeah. And bankers should be looking at this too because they’re loaning. They’re looking at the health of an organization and ultimately the sustainability.
You know the old proverbial bus. We’re all a bus hit away from not being here tomorrow. So, you look at the responsibility that an owner has. And it’s not just to his family, but it’s to all the stakeholders in an organization. And when you think about all the people that are involved. Take a company with 50 employees, and let’s say the owner has a wife and two kids presuming it’s a male owner. So you look at – well, there’s four people that are really involved or depend on the business. Sure. Let’s extend that. You’ve 50 employees. Let’s look at the spouses of those employees or the kids. You probably have 200 people that are dependent on that organization. Now, let’s look at the customers. Let’s look at the suppliers. Let’s look at the community if they’re involved. So that responsibility transcends money that an individual takes out, and it’s really important to look at the sustainability. And again things are not sustainable when they’re only dependent on one individual. So, again the reason –
JIM WASZAK: So, let me ask you, Ben. You’re out there doing business development for this, talking to owners about this. What kinds of things do you find gets their attention the most, resonates the most where this becomes exciting to them?
BEN POHL: Well, the older owners I meet I ask them, “where do you want to be in ten years?” and they look at me with a blank, blank face, blank eyes, and they say, “I really have no idea.” So, a lot of owners don’t even think about what am I going to do in ten years.
There’s a survey, PricewaterhouseCooper, that I always think about. And they split the owners they surveyed in four groups, so there’s 25% each. So, 25% said when it’s time to retire, we’re just going to close. Close shop, close door, business done. 25% then said I really have no idea. So, they haven’t even considered what’s going on. Then there’s 25% that say, well, we’re going to give it to our children, and that’s pretty much it. When time comes, we’ll just hand it over to our kids. Wham, bam, thanks. And then there’s the 25% that actually are going to sell it. So, the interesting part about that 25% is 70% of those are not going to sell, or they’re not even going to get close to what they expect. So, the owners until they really understand the issue at hand, they’re really hesitant consulting consultants. I know everything. I’m picky though. I built this. It’s my way. I’ve always done it this way. So, just showing the owners to think about the future and what they want to do.
KEVIN O’FLAHERTY: When you’re trying to put a process like this in place, there’s a lot of -- Any time you try to change a company’s culture, you need to get buy-in from all of the stakeholders. And I tried to do this a couple years ago, and I found some success somewhere in between the perfect ivory tower systems I wanted to create and the day-to-day chaos that was going on when I started. But it was very difficult to get buy-in from everybody, and a lot of times it seemed like we were having meetings about meetings. Eventually, I had to change some of my staff over to make it work. And now we do have a good delegation and good work flow. But it’s not as systemized as I initially envisioned. How do you go through that cultural shift without firing everybody on staff and bringing people on board?
RAYMOND PALYS: Sure, sure. You’re referring to change management, Kevin. As humans we’re all resistant to change. We drive the same way to work. We shave -- we’re males -- from the same side every day. We often eat the same breakfast. We’re creatures of habit. So any time you change an organization you’re disrupting the flow, disrupting individuals.
The very first point is always having people agree on the destination on a point. For example, Kevin, you talked about your firm. What you want to do is make sure that everyone’s on the same page with our destination. Much like the train that’s parked out front the office. It’s going from point A to point B. It knows its destination as does the conductor, the engineer, and all the people who are boarding the train. You don’t see people mingling in front of the train saying, “Where are we going? I’m not sure I want to get on this train.” Because they all know where it’s going. That’s the very first point. And you want to get that buy-in of where an organization is going. What I’ve found -- And I’ve advised over 200 companies in my career as a consultant -- What I’ve found is that when you can clearly articulate the direction of the company, it’s satisfying and comforting to people. Because that’s one of the top reasons of why people leave or choose to stay with the company is the confidence they have in the direction of that company.
So if point number one is to create a common goal of that destination, then from there you can look at it like concentric circles. You’re just expanding out that circle of participation and buy-in.
But to your point Kevin, you have to get buy-in otherwise you cannot change. But people need to know. There’s the acronym WIIFM. What’s in it for me? That’s what WIIFM stands for. You want to be able to explain why are we going through this organizational culture change. Why are we changing the way we do what we do? Incidentally, it takes about two years for culture really to set it. It’s not a switch. It’s not a computer software program that you can install on Friday and Monday come in, and it’s a whole new business. It just takes time. The culture is values of the organization; it’s the behaviors of an organization; it’s the sum of its parts. And so, it takes time. You have to reinforce it, and it just doesn’t happen overnight. But the process is very easy.
JIM WASZAK: I’ll respond to your question, Kev. Then I have an interesting one for you guys. But I’ve been fortunate in my management career. I’ve built some terrific teams. And I think the most important thing out of each and everything that was just said, you got to prune; you got to weed out. I mean, I had I think a staff of five or six people, and I probably fired the most people in the company because I just was determined to get people that fit what I was looking for and would understand my culture. So, I think you do have to do that.
But let me ask you this question. So I know of two businesses. One is in the used motorcycles and motorsports business. Another is in used packaging equipment, and it seems to me that the whole business is the owner because it’s based on his ability to look at something and just call it right. “That bike is worth $1,000. I can sell it for three.” He just knows that. How would you take a business like that and apply your theory to it, or can you?
RAYMOND PALYS: First of all, don’t get pigeonholed into that theory. Steve Jobs may have said that. Bill Gates may have said that at one point. And what are the organizations today? Microsoft is 40,000 people. Apple -- I don’t even know what the numbers are. But these are very large companies. Every business started with an idea, started around either the dining room table, maybe a lunchroom table. People decided to break off a company they worked with. So, every big organization was once small. Every large organization once had one or two founders. And so if we were fearful of that, we could not transfer that knowledge or build an organization outside of the owner, then the world -- we’d be back about 150 years. We would have all mom-and-pop companies with one or two employees, and that would be the world. But we know that that’s not the world today.
So, right there we know that there must be a method to be able to get around this. So, that leads into how do you do it. And it’s what we’ve talked about. Again, it’s that mindset. It’s creating that vision of three, five, ten years out. And then how do you build that team.
And I want to add another point. Jim, we mentioned about the purging of people. Well, let’s go back to the hiring, the beginning point. Let’s make sure we’re putting a round peg into a round hole. One instrument or tool that we use extensively -- And we’ve got clients that use it for pre-hires -- are behavioral assessments. And I prefer DiSC over Myers Briggs, and there’s a number of them out there. But it talks about why people do what they do and then the values portion of how we do what we do. Very, very important. You can learn in a matter of minutes what it can take you years to figure out in terms of putting the right people into the right place.
Now, we talk about the organization; how well defined is the mission, the vision, the values of the organization? Because that is part of the strategic planning process. That is part of identifying what the company is, why they exist, for whom they exist. So, many companies -- again we’re talking the smaller companies -- do not have a clear mission. They do not have a clear vision statement. They probably have words that they describe as values, but they really haven’t talked about how it is in their organization, how it plays out. As you can see, there’s a series of steps; there’s processes; there’s systems; there’s ways that you build an organization to become the Microsoft or the Apples of the world.
JIM WASZAK: And this is a clue I’m familiar with. In fact, a friend of mine does it, and he asked me to create a contest for him. He sends out this crazy scenario I’ve created and everybody’s got to identify who are the D’s, the i’s, the S’s and the C’s. So, yeah. It can be a lot of fun. It’s a good tool.
RAYMOND PALYS: Yeah, then you use them for pre-hire. They’re great instruments to build team effectiveness. In an organization, you have communication barriers, and I call them the Great Wall of China, the barrier to communication.
I’ll give an example. Most business owners who are using DiSC are what we call high D. Very driven people. They make decisions very, very rapidly. And let’s say they have an engineer that works for the organization or an accountant. They tend to be introverted. They tend to be very technical, very analytical, requiring a lot of information.
So, let’s say, Jim, you’re the owner of the company. You’re the high D. I’m the accountant or the engineer. And I come into your office and I say, “Jim, gosh. I’ve got this idea. It’s going to take me a while to lay it all out, but I really think this is a great idea.”
You’re listening for about 30 seconds you make decisions very, very rapidly so you’re getting a little impatient because I’m doing about a 45-minute presentation here. Finally, after 15 minutes you go, “Ray, I think that’s a great idea. We just have to schedule another time. I don’t have time for this today.”
I walk out of the office, and I say, “I don’t think Jim likes me. I think I had this great idea, and Jim just kind of shot me down.”
Well, Jim didn’t shoot me down. I interpret things differently than Jim. Jim interprets them differently. So, let’s say I went through a DiSC process, and we went through a workshop where we taught everybody how do you interrupt the different behaviors. And I know that Jim makes decisions really quickly, so the next time I meet with Jim I’m prepared.
“Jim, I got this great idea. Here. There’s four points. I just want to just give you a little sound bite over here, and then let’s schedule a time where we can get into the meat of it.”
Jim goes, “Great, Ray. I love the idea. Let’s schedule it for Friday at 2:00 we’re going to sit down and go over this.”
And I walk out and go, “Jim really likes me. This is great.” But this is this barrier of communication, and it really is as simple as understanding what drives us. Why we do what we do and how we do what we do. Not magic but darn close to it.
JIM WASZAK: Right, right. And I’ve been kind of on both sides of that. But the one in particular is coming up with an idea. I tend to be really high I’d with a fair amount of D, very little S and C. And I come saying, “Hey, we should do this.”
And they’ll say, “Well, what about that? What about --”
“I don’t know. Just giving you the big picture. Figure out the details.” So, I hear you.
KEVIN O’FLAHERTY: One of the things that I’ve struggled with in trying to implement my systems is that whether it’s a practice management system or calendaring system, whenever I try to bring a system into play or just say here’s our system of how we’re going to do meetings, if you have one or two people that aren’t following the system and buying into it and using it right, then the whole thing collapses in on the weight of itself because the other people in the organization can’t trust the veracity of what’s inputted into the system, so not everyone is using it right. A business owner says I want to institute this system, whether it’s an actual computer system or something much more esoteric, into my company. How do you get the employees to actually start using it other than just the passage of time and the business owner being the head of it?
RAYMOND PALYS: Yeah. I think it just takes a little more time, but I always recommend and encourage business owners to have people become involved in the process.
You bring up a good point of -- Let’s say it’s a system integration, enterprise systems going into a company. That’s going to affect every facet of the organization, its counting, its sales, its calls coming in. Everyone’s affected including customers and suppliers. This is change management. I recommend that the organizations put together little teams of people where you’re almost doing an impact analysis, but you’re getting a part of the process. When people take ownership and buy into a process -- I should say when people buy into a process they take ownership. Much like we talked about changing the culture of an organization. Sure, an owner can just say, “Hey, this is what we’re going to do. This is how we do it.”
Yeah, some people will follow it. Some people may not follow it 100% because it’s the boss’s idea, but when you sit down in a room -- And it may take you know if it’s a small issue, maybe it’s an hour discussion. But when people are part of a process, they take ownership. I always recommend take that time. And you’re doing a couple things one is you’re getting people to buy into the process they’re providing their input, but you’re also creating now a system and process of which decisions can be made without just the owner. So the dividends pay multiple dividends down the road.
JIM WASZAK: That’s an excellent point. I would say there’s potentially one exception to that though. And let me tell you a story.
This guy that I used to know. Haven’t seen him a long time, but he used to be in the jet engine parts business. And this guy has a genius ability to put deals together. Ask him what he did yesterday; couldn’t do it. Ask him to follow any kind of procedure; couldn’t do it. But a highly valued asset. They actually hired him an assistant to follow him around and capture all these details. I think in most cases if you get people to buy-in, it’s going to work. But if you do have unique talents, you may have to come up with unique solutions to take advantage of those things.
RAYMOND PALYS: Sure.
KEVIN O’FLAHERTY: That’s really kind of what’s happened in every single system I’ve tried to institute. Like I was talking about earlier, there’s the ivory tower way that in my brain when I write down on paper I’d like the system to work, and then there’s the way it actually works. And when things are -- As long as the business is functioning, you don’t ride people too hard about the logistics of it.
But if I had a team of robots, it would be great to say, “Okay, here’s the way I would like everything to function. Everybody do this to the T now.” But you find somewhere in between the reality of the chaos before the system and what you would ideally like the system to be is the way it works on a practical level. And you tweak it and sometimes you throw it out if people can’t follow it.
So, anything else you guys would like to share today?
RAYMOND PALYS: Yeah. Well, I think it’s just on that point there. It’s is the participated approach. TEAM the acronym is together each accomplishes more. And it’s hard for a founder a business after 10, 20, 30 years when they’ve just done it their own way to now say, “Gosh, I do want to create something beyond me. I want to create something sustainable.”
We know that family businesses only roughly 25% to 30% make to it the second generation, 12% make it to the third and only 4% make it to the fourth generation. It becomes increasingly difficult to pass on businesses for the long sustainability. But these processes work.
I’ll give you another great story of a client. They made the most money out of the work that we did. It was a construction company doing about 10 million in revenue, had about 100 employees, and the owner brought us in to put in systems processes controls so he could -- And he used this analogy. He goes, “Ray, picture a big tree. My arms are only going around half of the tree.” He said, “The dark side, the backside, of the tree -- I don’t know what’s going on over there.” He goes, “I just need to get my arms around that. Help me do that.”
So, part of the process was putting in managerial accounting controls. Part of it was furthering developing the organizational structure and his team of people. And this goes back. We go back 16 years on this.
Fast forward about three years into the process. The owner was comfortable in growing the business, grew it to 80 million in revenue, and sold it to a public company for $50 million at the 9-year mark.
When we talk about starting this process years in advance, this is why you do it. A lot of owners who think they’re going to sell their business or plan to sell it think, “Okay, in six months’ time I can just turn the business around.” But there’s so many facets involved in polishing up and creating a sustainable company. It takes years, usually two to three years. Then you want to have a good five-year track record to grow the business and then demonstrate to a potential buyer here’s how the business operates.
JIM WASZAK: I’ll support that by saying I know a number people in the private equity space, and when they buy businesses, one of the things they almost always want is management in place. They want to be able to just let it run the way it’s been running with very low involvement from them. That’s another good reason for.
RAYMOND PALYS: I’ll even add to that. I had the privilege of meeting someone that manages two of the Pritzker family’s private equity, and the number one criteria they look for in the business once they zig zero in the industry is the management team. They’re buying the management team. Again, they’re not buying an individual; they’re not buying a product; they’re not buying a service; they’re buying that management team and the ability of that team to continue to run that business without the founding owner of the business.
So, you can’t underestimate or overestimate just how important building a team is and hence that leads back to the opening statement of you create value when you can begin to structure and organize your company, so that it’s not dependent on the owner.
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Kevin owns O’Flaherty Law, a general practice law firm with locations in Downers Grove, Elmhurst, and Naperville, Illinois. O'Flaherty Law's attorneys have expertise in many areas of law including but not limited to divorce and family law; civil litigation; estate planning; business and corporate representation; commercial and residential real estate law; elder services, probate and guardianship; immigration; bankruptcy law; and dui, traffic and criminal defense.
Jim owns Success Enhancement, Inc., which is geared toward helping you solve management problems in a way that is fun and engaging by using improv comedy techniques and role plays.
Participants will see how to behave differently in the type of situation identified as an area for improvement.
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