Like A Champion Podcast | M&A Mastery with Wes Shelton

Sean Hutchinson | Fire Yourself! Exit Planning Done Right #16

• Wes Shelton • Episode 16

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Think your business is ready to sell? Think again. Sean Hutchinson, veteran exit planning advisor, reveals why 70-80% of your wealth may be trapped in an illiquid asset - and the single most common mistake that's destroying your business value right now. In this eye-opening conversation, discover why most baby boomer business owners are dangerously unprepared, what buyers REALLY look for when evaluating your company, and the counterintuitive strategy that can pump your valuation by 40%, faster than you think. Whether you're planning to exit in 2 years or 10, this can change everything. The question isn't, "What's my business worth?" - it's "What am I doing to make it worth more?"


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[00:00:00] Introduction to Value Acceleration

Sean: If your business goes from being owner dependent to not owner dependent, you probably pump the value 40% on the day that you, let's call it fire yourself.

[00:00:17] Guest Introduction and Background

Wes: Sean, thanks for coming. Sure. As our guests don't like a champion, we've been talking about it for a while. Excited to have you came all the way in from Denver to do it. That's right. Maybe not just for me, but we'll, we'll stick with that story. Um, it's great to have you. 

[00:00:32] Understanding Exit Planning

Wes: I think that, um, I had an opportunity to hear you speak at a number of different venues and mainly, you know, my understanding of your line of work is a certified exit planning advisor mm-hmm.

Cipa Focusing on exit planning and value acceleration. Yeah. Those two things that go hand in hand. Tell me how those terms are distinctly different for you and a little bit more about what you do in your line of work. Okay. On day to day. 

Sean: Well, you're right. 

[00:00:56] The Evolution of Value Acceleration

Sean: I mean, I, I sort of got into the exit planning and the sort of what would become value growth or value acceleration later.

The story is when we started to get our certification at the Exit Planning Institute, it really was completely focused on something called the exit plan. We are actually taught not to think about it as an active process, but. You're gonna go through some steps, and then you're gonna end up with this physical artifact, and then you're gonna take this big three ring binder that had 52 tabs in it, you're gonna plunk it down in front of the owner.

And somehow that was gonna motivate them to do something that was really frightening in a way. Right. Because owners are really kind of honestly ambivalent most of the time about actually getting out of their business. Mm-hmm. Because their identity as an entrepreneur is really important. Right? Yeah. And that identity lives in the business itself.

So in 2008, we got our certified exit planning advisor. There were a number of us in the, in the firm that did it at the same time. There weren't very many of us, there were less than a hundred in the world, and there are probably 8,000 now. 

[00:02:00] Challenges in Exit Planning

Sean: So kind of watched this thing grow up over the years, and the whole issue of value came up because when we started talking to business owners about exit planning, we were basically just stonewalled.

They didn't want to talk about it. Now, this was late 2008. It had a few things on their mind at that point. Right. Besides not that 

Wes: long ago. In the great scheme of things, it's crazy. Absolutely. 

Sean: Yeah. I mean, this is a, this is the kind of conversation that's really only been going on 20 years probably in some meaningful way.

Yeah. Right. Yeah. With a, with a discipline behind it, let's say. Yeah. Before that I think it was just kind of slap dash stuff so I was looking for a question honestly, that would, that would. Get 'em to lean in. And I tried a lot of different stuff. 

[00:02:40] The Importance of Business Valuation

Sean: Finally, the one that got their attention every single time was, do you know what the value of your business is today?

And what I loved about that question is, one, I got 'em to lean in because everybody's, you know, curious about the value of their business. I think a lot of owners have ne have never had their business value or don't really understand why they should have their business value. To get a baseline [00:03:00] valuation is a pretty complex area, right?

And the nice thing about that question was no matter what the answer to it would be, we could have a further conversation about it. Yes, I've had it valued. How long ago? For what reason can I see the valuation? Let's see what's in it. Let's see what resonates. No, I've never had it valued. Well, let's talk about why it might be important.

So on so forth, that really became the focal point of what we call value acceleration or value growth now. And those terms did not exist in the way that they exist today. They did not exist at all in 2008. We did not have the idea of it raise my mind, value growth advisor or value acceleration. Yeah. I still remember when Chris Snyder and I, Chris, the owner of the exit planning institute, longtime friend of mine, we actually sat next to one another in the, in the SEPA course.

We sat down and sketched out what became the value acceleration methodology that all of us use today on the, on one piece of paper at the Fairmont and Scottsdale. After a couple of drinks, we sat down in his hotel room and said, we gotta change this process. And we have to make it something new and we have to put value at the center of it, not necessarily the idea of exit planning being the core activity.

Now, why is it important to owners? One, if you're gonna build the value of your company intentionally, forcefully over time, and it's not an easy thing to do. You know this from your own work. Mm-hmm. It's not an easy thing to build a more valuable business and keep it valuable, but if you're gonna do all of that work, the next, the next conversation that you want to have is harvesting out of the business.

And of course, business owners, net worth is most of the time completely tied up in their business. And that is a very illiquid, difficult to monetize asset. Yeah. Right. Failure rate's very high. So that whole conversation ex, it just sort of expanded the world got bigger in our profession when we started talking about value as core to the process rather than just let's create an exit plan.

Yeah, yeah. 

Wes: Right. You alluded to this earlier, but starting to have these conversations back when people weren't having them. Mm-hmm. And using terms that people weren't using. 

Yeah. 

What drew you to exit planning, value acceleration? What drew you to this line of work? 

Sean: Yeah, it's an interesting question. 

[00:05:17] Sean's Career Journey

Sean: So I sort of bounced around in my career, but, the inflection point was when I was hired to be the CEO of a fast growing.

Institutional real estate consulting firm. So I was living in Chicago at the time, and that firm was really a Wall Street firm. We had clients like Goldman Sachs and, you know, Prudential and these big, big real estate investment houses. And it was a sophisticated firm. It was already doing well. And they hired me because I really am a growth guy, I guess I would say.

Yeah, strategy and growth. That's kind of where my passion lies. And so they said, look, go triple the sides of the firm. Go. They set me loose. And our competitors were like Cushman and Wakefield. Mm-hmm. Cp, Richard Ellis. Pricewater Coopers. And I had to figure out, I mean, we were in upstart.[00:06:00] I figured out a way to beat 'em and speed was one of the ways that we could beat them, create an agile business model, grow the firm like crazy.

[00:06:08] Building and Growing a Business

Sean: I had a really nasty habit of sending clients that I didn't want to my competitors. So, so I was competitive. I wanted to win. And so we did in three years, we tripled the size of that firm, but we did a lot of acquisitions to do it. We grew organically and eventually we ended up with, I think it was 56 offices in North America.

Bigger, bigger spread, bigger footprint than any of the other firms. Very local market oriented, right? So we would have people in the market. So that was part of the strategy too, is differentiating. Now I had never done acquisitions before. Dirty secret. So when I took the jobs 34, when I got hired as this CEO, much too young to do this job.

And I didn't know how to write, read a balance sheet. I didn't know anything about governance. I didn't know how companies worked. I had never got, somehow they hired me because I think they saw some potential. They saw a hard worker, they saw someone who could kind of see around corners and get out in front of it.

So I had skills in that regard. But when it came to the nuts and bolts of running and growing a business, other than my exposure to our family business, right. As I was kind of growing up, uh, uh, that, that's a very intangible kind of, oh, we're a family in business and I know we got this factory and all that kind of stuff, but it's not like I went into the office and learned all of that kind of stuff.

So I had to learn on the job. I had to sort of exercise and build muscle mm-hmm. Around what it meant to grow a business. But I loved it. And I really liked the transactional aspects. When we were building businesses, they were small transactions, but we did a lot of like 35 in three years. It was insane.

So when I came out of that job, when they, when the board kind of said, this has been fantastic, but I think we're just gonna like run, but not really grow. I said, I don't think I'm the guy for that. I'm gonna get under hood. I'm gonna make a mess. I just can't mm-hmm. Stand stand. I can't be in one place.

So, , I moved to the west coast from New York, but I started a boutique investment bank. 'cause I wanted to keep doing that transaction piece, right? Mm-hmm. I wanted to guide, but what I missed. Was the actual nuts and bolts, the growth, the strategy, building an operation, leveraging technology. I just found myself drawn back to it.

We also just saw a business opportunity, honestly, at the time. I don't know how we found out about the cpa. I can't remember how we found out a bit CPA at that time. 'cause it was tiny. It wasn't really out there. Right. Must have stumbled across it. We were, we, you know, it was the silver tsunami story, which is still going on today.

Yeah, sure. It was like all these baby boomers are gonna exit their businesses and they're gonna do it fast. It's all gonna happen the next five years. Didn't happen. It's gonna happen in the next five years. Mm-hmm. Didn't happen. 

Wes: Mm-hmm. 

Sean: So we wanted to be on the front end of that. We saw the aid, the demographic.

Right. It was the bowling ball moving through the snake, so to speak. This demographic of baby boomer business owners. The United States had [00:09:00] never seen anything like that before. Created a huge amount of wealth, a huge amount of entrepreneurial success and identity in the US macro economically. It was the biggest economic pop.

Wes: Yeah. 

Sean: Right. Sure. And these people started their businesses ground up, you know, this was spade work to build these businesses. Right. There were, there wasn't a whole lot of inherited wealth at that time. So you gotta have a lot of respect for that entrepreneur that grew up, that became the baby boomer.

And that's where we saw our business. We're gonna get right in there with it. But as it turns out, baby boomer business owners didn't love talking about. Leaving the thing that they really like building. Mm-hmm. 

[00:09:42] The Role of a Value Growth Advisor

Sean: So, our work as value growth advisors, I was drawn back to it because I realized I just like building businesses.

I like helping business owners build better businesses at the end of the day. But to have that idea, to be able to communicate that idea that if you're gonna do all this work, don't you wanna harvest the value? You're just gonna let it kind of, yeah. You're gonna die at the desk. And then the value really is, you know, potentially gonna go away.

How does that help you? How does it help your family? How's it help your employees, your vendors, all these people that you know depend on you? Yeah, sure. So why would you miss that opportunity to see that legacy sort of continue? 

Wes: Yeah, absolutely. I mean, my next question is kind of similar to that. You talk about the part that draws you to it.

Yeah. 

Um, what I'm gonna ask is what particular strengths or skillsets, or sometimes people are a little dramatic and they'll say your superpowers. Right, right. Super. I do kind of like that superpower, but Yeah. You know, when I, and I'm just preface that by saying the kind of work that you do I've said this before in the program, I got my CEPA certification to do not necessarily practice exit planning, but I have a, an understanding and appreciation for the work.

Mm-hmm. And the way I see. Uh, that kind of work can be, I think, very challenging. It's, although it's very needed, you're dealing with a lot of different variables in any particular private business. Right. Especially a family business. Sure. You've got different motivations and egos and, you know, what's the workplace dynamics and, you know, people have their own psychological needs.

Right. People want to feel important. So they do. You have these, you have the owners and what their motivations are when we talk about legacy. And then sometimes, you know, you've got people who are trying to earn their way and earn in life and Sure. Trying to build a, a living for themselves and their own legacies.

And then sometimes you got family owners working in the business and then sometimes you got family owners who are not working in the business and spouses, all those things. Like, yeah. What do you think the superpower is that you bring to this line of work? 'cause I think it's very challenging to do what you do, and that's a, that's a compliment by the way, if it wasn't 

Sean: obvious.

I would agree. It is challenging work and that's one of the things I really like about it, because you very rarely see thus same thing, right? Business 

Wes: would family to 

Sean: family. So you're always, picking up new data and new situations, trying to integrate it into [00:12:00] your practice, your expertise.

So I think, my superpowers have always been related to, I think seeing around corners a little bit. Yeah. But my challenge is that I can see around the corner in a way and can help people kind of, you know, hey, from scenario planning standpoints, there are lots of ways that this can. Play out. So let's try to look ahead, let's try to lift the chin and not be, you know, so head down in there and I can guide people to do that.

One of the challenges that I've had is sometimes I walk around the corner and don't realize anyone's following around. Yeah, yeah. So I'm, I'm kind of looking around like this going, what happened? But in order to do the work well, I really feel like you have to be able to have really good conversations with owners and their families.

You have to spend a lot of time with them. You have to time ask good questions. Yeah. You have to engage, you have to persuade. Right. And that, I, I think that's really been the skill, that communication that Yeah. To a certain extent. Patience. Yeah. I guess, and I don't mean that in any condescending way, what owners need to be heard, family members need to be heard.

All of the things that you just talked about are part of a, you know, there's a certain complexity to it. Right. And the temptation probably in doing this kind of work is to nip things around the edges and try to simplify it down just to, you know, to not embrace the complexity. And I think you have to embrace it.

I think you have to embrace it to the extent that you can be passionate about the complexity involved in these things. Because every single one of the things that you mentioned matters. Every single one. You can't, every, every single person in that dynamic, whoever they are, matters. So if you take that viewpoint, that one, you're not gonna do this alone.

I've got a really great team around me, right? Mm-hmm. Yeah. So it'd be crazy to try to exercise my brain at that level. 'cause I can't. But if you can just appreciate that whatever we are talking about in we use value growth or value acceleration, or exit planning. This is a fundamentally human work, right?

It's fundamentally human to start a business, build a business. We tend, as technicians, we can kind of miss that, right? Oh, we need to improve the margins. Okay. Yeah. Right? Yes. The answer to that might be yes, everybody might agree, but there are real, uh, sort of human aspects to improving the margin. 

Wes: Yeah.

Sean: Are you gonna do it by reducing your workforce, right? Mm-hmm. You may indeed have to do that. Maybe the business is not running as efficiently as it should be or as productively as it should be. Are there other options to actually improve the, uh, value of the business or the performance of the business besides reducing the workforce by 25%?

We always say that whatever we recommend, whatever [00:15:00] we facilitate or we have to persuade the owner to do, has to help them be successful in a way they feel good about it. 

Wes: Yeah. Yeah. 

Sean: Second part of that sentence being just as important as the first. So we want them to be successful, but if I go to somebody and say, I can make your business more profitable, but I need you to reduce.

The workforce by 25% to start, they're not gonna feel good about that. 

Wes: Yeah. 

Sean: Because owners are really good at what they do and they're brilliant at building businesses. But I can tell you it matters. That conversation and the way that we handle it matters more than getting another two or 3% on the bottom line, honestly.

Yeah, yeah. 

Wes: Know when it comes to exit planning, Sean we talked about this over and over again, but do you see, and there's plenty of statistics behind, I think when they do the EPI does exit planning institute does their owner 

Sean: Yeah. The surveys, the, uh, state of owner readiness. State of owner readiness.

Wes: Thank you. And you look at the statistics, you know, back early on 10 and 15 years ago about the number of owners who actually have an exit plan in place, written or otherwise versus now it's drastically different. I feel like that this, you know, this is something that is much more on the forefront of their minds in exit planning.

[00:16:14] Generational Differences in Exit Planning

Wes: Do you see a difference in the average owner's mindset today than when you started in, in this line of work? 

Sean: So maybe we could talk about that generationally. 'cause it's interesting. Yeah. Last, sure. The na, the last national survey that came out, which I think was only the second one that had happened back in 2010, I think it was the first one that was a national survey, and they didn't resurvey nationally until 2023.

Okay. Right. Maybe it was 2000. It was about 10 years apart, as I recall. Right. So what we have found, what we found in that survey. That the situation with baby boomer business owners hasn't changed that much. 

Wes: Is that right? It's 

Sean: interesting. They're the, they, they tended to be the least educated on these issues.

They still didn't have a good team around them. They just simply, for whatever reason, had not fully embraced the idea of planning for an ownership transition. And remember, we as a firm are completely agnostic regarding the pathway to exit. I mean, you know this. Yeah, sure. Right. So we are not, we're not m and a advisor.

We don't run transaction processes like you do. So if an owner says, I wanna keep it in the family, we're prepared to support that. If they want to sell it to the employees through an ESOP or whatever, we're prepared to support that. That survey found that baby boomers really haven't changed their ways very much, to be honest, really.

And they've got that. That's kind of a problem for us as a country, by the way, because so much wealth is held in that category and that generation, and so much of that wealth is held in businesses in general, business owners of that generation, compared to non-business of business owners of that generation are four to eight times wealthier, right?

Mm-hmm. As owners versus employees. And they hold [00:18:00] 70 to 80% of that wealth in their business. Now, if that wealth doesn't get harvested, if that wealth, if there isn't an ownership transition, that at least moves it from this generation to the next generation or whatever, that might look like money in motion, so to speak.

If that doesn't go well. Think about the amount of money that's been sucked out of the US economy when people go into retirement and they generally get more, more conservative with their spending anyway. Yeah, yeah. As they get older. But now they're gonna have less money to spend and since we, what is 73, 70 4% of the US economy is spending consumer spending.

Yeah, sure. So think about baby boomers not having as much money. That can have a real impact. So I'm worried about that. Now, if you go to the other end, if you went to, you know, gen Z, gen X, better planners. Mm-hmm. As it turns out, more open to advice, baby boomer business owners turned out to be really resistant to outside advice.

Gen X, less so. Gen Z really opened outside advice and most of the Gen Z owners already had a team. 68% of 'em I think it was, had a plan. Uh, interestingly enough, seven out of 10 of them said they wanted to transfer internally, not selling the business. So that was interesting. Could change all the time.

As you know, people say, I don't wanna sell it to an outside party. They end up doing that anyway. So, but it was just a really interesting segmentation by generation there, by the age groups and how people identified themselves. So we see big change in the younger entrepreneurs, much more openness to planning and openness to just sort of ownership transition in general.

A lot of them had already diversified equity within their firm. I wouldn't say they necessarily did it well. But they were sharing equity from the beginning, so there wasn't kind of a, um, call it equity hoarding kind of strategy. By the way, I think families should hoard their equity. I've always, I, I'm, I would tell them to be jealous of their equity, honestly, because partnerships are hard.

Mm-hmm. But, uh, I think in general what we saw was a movement in the right direction, just more movement in the younger generation. 

Wes: Yeah. That's fascinating about the generational type of mindset. And I, I believe I had read that last owner readiness survey and, and seen some of that as well. And, um, yeah, it's really, really interesting, um, about the mindset there.

I feel like many of the business owners don't really realize how important exit planning is, like we're talking about. And I'm curious if I think that there's a perception there that anytime you use the word like consultant, that there's some sort of Yeah. Just sort of nebulous arrangement where it's, it's hard to really understand what, what are the real outputs and the benefits?

Are they definable? Yeah. Are they measurable? What would you say is a single most common misconception business owners might have about the exit planning or value acceleration process? Is there one thing that stands out to you about that? Well, 

Sean: I think that there, the, [00:21:00] first of all, I think exit planning is just good business, right?

Yeah, I think so. I've always said by, remember. Exit planning is an active way of saying it. Right? I actually don't think once you get into exit planning, I don't think it necessarily stops. I don't think it's about necessarily, I mean, one output I suppose is an exit plan, whatever that might look like. But you know, as well as I do that things change quickly in today's world.

Mm-hmm. Right. So the business is gonna be, continue to be configured and reconfigured the market is gonna shift, all those kinds of things. But this is what I think is interesting about exit planning. First, it's good business, but I also think it changes the way that owners and their teams make decisions on a daily basis.

So if an owner, first of all, let's talk. So if you, if you accept that value acceleration, exit planning are kind of twinned in a way. Mm-hmm. Right? So there's, there's, there's no reason to do one without talking about the other, right. That, uh, if an owner says, um, Hey, we're thinking about taking, we're thinking about doing X, right?

They're thinking in their mind, in the shower this morning, I had an idea, we're gonna workshop that as a team. We're gonna figure out whether it add viability, maybe we come up with a plan stop. Does that add value to my business? Right? Mm-hmm. That's different, that's a different question than does it add revenue?

Does it add margin? It's a diff There's a risk issue here that I think a lot of owners miss. The, the implication is that value is built primarily. Based on higher revenues, higher profit, right? Mm-hmm. But you can make a business much more risky if you make the wrong ki if you, if you pursue the wrong kind of revenue, if you pursue the wrong kind of profit.

Right. And by not every dollar is the same. So, so we're always talking with owners about Yes. Need the business to grow. Yes, we need the business to be performing financially best in class. That's where you want to be. It's absolutely true, but we also want the risk to be as low as possible. Mm-hmm. Right.

So these are, this is a, a more complex question, uh, more complex kind of conversation. So if I'm making decisions as an owner, if I'm putting myself in the entrepreneur's shoes, I want them, every time they do something, I want them to intentionally say, is this gonna increase the enterprise value of my company?

Is it going to increase the transferability of that enterprise value? And, um, is it something, is, is it a decision that we would make today as a team? Or am I making a decision as an owner? Right. Because I think, I think owners deserve, uh, to be credited with the fact that they are share, they are a shareholder, they are an owner, and their decision framework may be different than [00:24:00] their chief operating officer.

Their chief financial officer. Mm-hmm. Right? Doesn't have that kind of stake. Right. And usually it doesn't have that kind of stake in the future performance of the business. So my point being value growth and exit planning as an active exercise for long periods of time, uh, is a decision context. It's a way to think differently about making decisions in your business because anything that you do that decreases your options for harvesting or takes value out of the business, I would say shouldn't do.

And sometimes it's tempting to do that next creative thing. I like that. Right, right. But there's a discipline to it, a cycle to it that you really need to respect. And I think people, honestly, I think if you're exit planning, I think you should, you're just kind of on a sort of a constant just cycling of, uh, you know, maybe every quarter we stop and we think about this quarter.

Did we add an enterprise value? Is it transferrable? Do we add, do we need to change our plan? So on so forth. 

Wes: So that value acceleration, a lot of that is getting the relevant parties within the business to be aligned on how they make decisions. Sure. Absolutely. Fundamentally, right? Absolutely. And getting them the reason for it, the same page.

And I, I would think that if you're able to do that successfully, then at the same time, you're probably increasing the autonomy of the people in the business and giving them the ability to, you know, think the same way that the owner would want them to think and, and thus sort of, you know, pushing down and.

Of that, that decision making ability and making the business Yeah. A little bit less dependent on the owner. Right. Because, well, that's, we have to go to him every time or her every time. 

Sean: Yeah. That, that, that is absolutely necessary. One of the things that we see most often, I would say, in situations where we're getting involved, one of the reasons that we're getting involved in driving value of the business or, or increasing performance, that risk of owner reliance, the owner dependency, that's probably the most common and the most destructive risk we see in businesses when we start.

Now, I'm not saying that the owner should be in any way eliminated from the business. That's not the point of that. They have an incredible knowledge base. They have entrepreneurial spirit. Right. They have that kind of drive that a lot of people don't do. They've taken from the outside looking in. Most people would say, I don't understand how you can live with that level of risk.

Right, right. Every day. Mm-hmm. But they do. They've embraced it. And that in, in many cases, I think has made them better people. Right. They are community, they're citizens of commerce. Mm-hmm. They're community leaders. They make, at the end of the day, they make the places that we live more interesting, better, more attractive, more valuable.

There is an ecosystem that's directly related to their entrepreneurialism that wouldn't exist in community states without them. So they deserve that credit. However, if you do not pass that authority. Maybe not total autonomy, but the [00:27:00] authority to make good decisions in the business. If it still rests with the owner, then the business just simply can't thrive in terms of value creation, right?

Mm-hmm. So it's really important. Can you imagine a business? I think it rarely happens, probably, but as an ideal, could you imagine a business where every single person in the business thought, like the owner, take away the bad habits? That owners something, right? But let's call it ownership thinking, right?

If everybody in the business thought like an entrepreneur thinks on a daily basis, how do you think that business would do? How much value would it have if you look at it through the eyes of a buyer or the eyes of an investor? If I'm looking at a business like this, like that, and I can see it, I can see people talking about it and making decisions, and the owner being able to stand back, having transferred that authority and that kind of culture of ownership, not just the expectation that they should think and act like owners, but they get rewarded for it.

They get recognized for it, right? You drive that kind of culture. I don't think I could get my checkbook out fast enough to buy that business because for instance, I, if I'm a private equity investor, right? I want all the businesses that I own to look like that. So this idea of, of ownership thinking as a concept, but also how do you systematize and kind of make that just a way of life within your business, that kind of thinking.

That to me is just sort of, there's no ceiling on value for that kind of thing. If an owner thought about that every day, instead of worrying about somebody, being able to, buy better or invoice better, people can learn to do that. But you need them to learn to be entrepreneurial thinkers.

Mm-hmm. 'cause that's where problem solving is gonna come in. That's how they're gonna actually not require the owner to be in the business in order for it to be successful. 

Wes: Yeah. And most businesses to that point that we see don't really have any sort of standard operating procedures Yeah. That are, that are formalized in any sort of way.

Yeah. Let alone, have everybody thinking just like the owner, right. Yeah. 

So 

yeah, you don't see a lot of that alignment. And certainly not, you know, without formal training programs and, and stuff like that. And it, it was the smaller, lower middle market businesses tend to fly a little bit more by the seat of their pants.

Yeah. And you would see, you know, from our viewpoint, you can see where that could add a tremendous amount of value to get that alignment and, and that sort of decision making. So it's an interesting observation. Um, one of the, the foundational tenets of, uh. 

[00:29:41] The Three Legs of the Stool

Wes: The SEPA methodology is the three legs of the stool.

That's right. Right. Yeah. And so personal, financial and business goals. Yep. All into one master plan. Can you just talk me through at a high level, you know, how you do that work? 

Sean: Sure. That's a powerful metaphor, and it's one that resonates with owners. It's [00:30:00] one that I've had in my back pocket, honestly, in conversations with owners for a long time, because having done this for a long time, I've seen the way that owners react to that concept.

And it is really it's kind of a first timer for a lot of owners when we talk about it. They're kinda like, wow, I never really thought about how optimizing the value of the business, creating per personal financial readiness and having a plan for life after business would fit together in a way that must be balanced or the mm-hmm.

Stool is kind of falling over, right. Getting wobbly. So how are we gonna approach that? First of all, when we first start talking to, to business owners, one of the things that's gonna set us apart as consultants, as business advisors on the value growth side is, and I often say to uh, owners, you're gonna wonder why I'm about to ask you this question.

You're gonna think I'm crazy because no business advisor will ever ask you this again. What is the status of your personal financial planning? Tell me to go to hell if you want me, if you don't want to tell me anything. Yeah. And they'll say something like, well, that's an interesting question. You're right.

Why are you asking me that? Mm-hmm. And, and then I just talk about how this be the personal and the business begin to link together. Right? And the business being their biggest financial asset, being very illiquid. If they don't have a financial plan, often we'll then say, well, let's get you one, right?

Mm-hmm. We don't do it. Mm-hmm. But we're gonna, we're gonna bring those various professional disciplines to the table to make sure that the owner is surrounded by the folks who can help them think through it and, uh, answer questions that are gonna be absolutely key to their future. Right? So we're link, all that we're saying is we can't talk about the value of your biggest financial asset, right.

That business without also talking about do you have a personal financial plan that would take that into account? Most financial plans for owners could be absolutely comprehensive on assets that are outside of the business. For instance, the real estate, their retirement accounts, their investments, all that kind of stuff.

But I can tell you most financial advisors might be aware that they have a business, but never say, do you know the value of that asset? And the owner might say, really have no idea. Well, what happens? They'll say, well, let's just put 10 million in the plan. We know it's there. Let's put 10 million in the plan.

And I call that. Taking that very important asset and putting it over in the corner of the conference room and pulling a potted plant in front of it so that you're going, we know it's over there. We'll just deal with it later. It's just kinda lurking. Right. So the business might be worth 50 million, it might be worth five.

It's wherever the starting point is, we have to actually have a number and then we need a plan around it. Because most financial advisors, quite frankly, aren't incentivized to deal with a highly liquid private security. Mm-hmm. Right? 

Wes: Yeah. 

Sean: So we have instantly in the financial plan, uh, an [00:33:00] investment concentration problem, right?

Wes: Yeah, 

Sean: sure. If your investment advisor called you as a business owner and said, Hey, I've got a really great idea. I wanna take all the stuff that you've got in an investment account. I wanna sell all your real estate, and I'm gonna redirect all the capital right into one stock, that will be almost impossible for us to monetize in the future.

Yeah. What do you think? But that's what business owners do every day. 

Wes: Yeah. 

Sean: That one stock, that they've invested all of their money, all of their life, all of their identity, and it's right there for a financial plan to be created without actually dealing with the realities of that asset. That doesn't make any sense.

And when I say to owners, do you, are you understanding how this all fits together? Right. That personal in the business, they'll go, yep. Now I see the parallel path. Now I understand this. I often describe it as the business and the personal as two, the two sides of a DNA helix, right? They're moving there, right.

Sort of twisting in concert with one another. But all those little rungs that make that DNA ladder are the communication and the collaboration. The problem solving between the different fi, the, the different, uh, professionals that are gonna be on their team, the insurance advisors, financial advisors, the attorneys, the m and a advisors, everybody that's gonna make this thing this complex interwoven thing happen in a way that makes sense.

So once they see that, the personal and the business tying together, and they begin to warm up to that conversation, which doesn't take very long, quite frankly. Yeah. Owners have a sense that they have a problem, which is it's all in that pot, 

Wes: right? 

Sean: Then I say, okay, if we can monetize it, if we can get it into the financial plan, and we can, we can work towards the value and we can work towards harvesting that value in one way or another, and we can reduce your risk profile along the way.

Mm-hmm. Then let's say you sell it for 50 million, what are you gonna do? Yeah. What are you gonna do with that? And they say, well, that's one reason why I don't wanna sell it. I don't know what I'm gonna do. I mean here, 14 hours a day, this is how I talk about myself when someone asks me a question. They know me at the golf club, for instance, as a business owner, right.

They know me that way. Mm-hmm. When I go to church, they know me as a business owner. My, the identity is built around that. Now, first of all, that's pretty dangerous. So you hope that someone has a life outside the business, but sometimes it doesn't happen that way. Yeah, right. But that life after business question and that plan around it might be the most under sort of undervalued, if you will, no pun intended, undervalued part of the whole process.

I happen to think it might be the most important of the three legs, because if you don't have a reason to set the alarm the day after you are not any longer a business owner, there will be an emptiness. I think that, uh, becomes really, really dangerous. I've seen owners exit their business and sink into, uh, marital problems, substance abuse.

I mean, you know, just misery almost. And, and [00:36:00] what I'd say to owners is, I'm not trying to scare you away from it. All that I'm saying is if you don't do that part of the planning that, and you're, you don't have that same purpose and meaning. Yeah. It's not what you're gonna do. Often I'll have, you know, the owners will say, well, I'll, I'm gonna do these things right.

I'm busy. I'll be busy when I've left my business. That's not the point. The question is, who are you gonna be if you're no longer a business owner? Who are you going to be when you're not these? That's a really important question to pose to a business owner. And I think one of the most difficult to answer because they've maybe never been challenged to think about it in that way.

And so when you put all these, those things together, the three legs of the stool, this, this sort of triangle, all of a sudden they start to say, oh no, I understand why I need all these people at the table. I didn't understand why I needed to have, you know, a uh, you know, personal planner. I didn't understand why I needed to have a personal financial plan.

I didn't understand that I needed somebody who could really help me with the state estate and tax planning. I really thought about that. I have a trust. Well, good. Yeah. Yeah. But probably for a really high net worth individual, not even close to enough, I'm not gonna be able to do all that stuff. I'd be crazy to, that's not my expertise, but I can bring a good team together and quarterback it and play the role of the value advisor at the same time.

So my job is to handle that, optimize the business value, like of this tool. That's my focus. But I also wanna make sure that all of those team members are working in concert, staying connected in that DNA helix. Right. And that, I think, for business owners is where the magic happens. Because all of a sudden they, they know they've got people on their side.

The professionals know what they're supposed to do and why they have someone who's quarterbacking a really complex thing for them on their behalf. Mm-hmm. And what happens, their blood pressure comes down, first of all, because now they're beginning to see something emerge that is comprehensive. Right.

That's holistic. 

Wes: Yeah. Right. Holistic. 

Sean: They've got, they're being paid to their, their humanness is being respected in this process, not just about the business. Their family's being respected, the things that matter the most to them are on the table and they're being talked about. So their blood pressure comes down and it converts ultimately to peace of mind, which I think probably is the most important outcome of the whole process because in today's world, we very rarely have it.

Yeah, sure. And, and entrepreneurs, I personally think they need more and they don't very often have the space in their lives to get it. So, so by putting some oxygen into that conversation, by, by making it a little bigger and a more and more holistic, I think ultimately they just kind of breathe easier.

And I love to see that. I, I've seen the moments in this process where owners just kind of, yeah, take a deep breath and let a lot of stuff go. [00:39:00] That's beautiful to watch.

Wes: Yeah. That's amazing. I think that, um, I, I kind of compare it sometimes, and it's not the exact same thing, but you look at a lot of the, the clients in the prospects that we deal with.

5, 10, 15, 20 $5 million businesses. Yeah. True. The lower middle market businesses. Yeah. Not small business. No. But they, they don't have the budget or really arguably the need to have a c-suite like you would see Right. You know, in a, in a, in a large cap biz or, you know, sort of blue chip Wall Street type of business.

Right. But essentially that's what you're doing when you're bringing in the outside advisors, right. Is you're building your sort of personal C-suite. 

Mm-hmm. 

You're relying on the expertise of people who specialize in doing these things that you need. Yeah. Right. Whereas a large cap company would have A-C-E-O-A-C-I-O, chief marketing officer operations, everybody performs a very critical role.

Yeah. 

In a smaller business, you don't, you don't have that C-suite in that sense, but having a financial advisor, having a proper estate attorney, having a proper value growth advisor, that's what you're doing to build that team that you need Yeah. To provide, you know, the value acceleration and the risk planning.

Yeah. You know, that you need. And so I think once they, they realize a lot of 'em, they don't know what they don't know. And, and to be fair to business owners, and I always try to be devil's advocate unto, you know, why sometimes they're reluctant to, open up to having. If these advisors are, consider these services, they're people are trying to sell them stuff all the time.

Mm-hmm. Right. That's true. You know, marketing services, they get snowed with calls wet and you're just, you're getting bombarded with these things. And you talk about the older, you know, baby boomer generations too, these are generations that had to learn and kind of rely on themselves.

They 

Sean: do very 

Wes: self. So, so we're all a product of the systems that we grew up in. Mm-hmm. 

[00:40:52] The Human Aspect of Exit Planning

Wes: So I, I like to think, even though you and I are sort of at different lines of the continuum in terms of the services we offer we're advisors, but we're shrinks too. You know, you've got to learn to understand and have the tactical empathy or where these people are coming from.

Yeah. They're the ones that are taking all the risk. Yeah. Right. And they're spending all their time and energy on their most vital asset that represents Yeah. You know, not only the majority of their net worth, but their identity. Yeah. And so, a lot of what we do I see is project management, you know?

Mm-hmm. We're hired to go run through a process. You're quarterbacking the value acceleration process. And when it gets passed to us, we're quarterbacking the sale and the transition process. And we're managing so many different things at once. And sometimes I do need to step back and say, you know what, this is a really emotional process for our client.

Mm-hmm. Yeah. And maybe today I don't send that call or that email or make that, you know, yeah. That, that text message they might need. An hour or two. There's, we've bombarded him with a lot today. Yeah. Let's, let's just start tomorrow. Or if it's Friday, we'll we'll give 'em a weekend arrest on Monday and [00:42:00] we'll lead with, you know, Hey, I know this is a lot on you.

It's an emotional process. And I've had clients break down on me before where they, they, they've said, I, I didn't think I had an emotional attachment to this business. Yeah. But going through the process and the diligence where you're getting poked and prodded, you know, with like, that's really true. All of these requests and, and they're like, this just really got to me.

And I said, you know what? Totally get it. Let's, let's put a pause button on today. Yeah. Let's revisit tomorrow. You know, take a mental health break. And so we even, we have to remind ourselves as much as we are aware of this and experience it that, you know, sometimes it's not about going forward as fast as possible.

Sean: Yeah. Well that's the essential humanness Right. Exactly. Of the process. The logic 

Wes: would tell you, yo, we can get this done today. Right. Why don't we do it today? No, yeah. It's okay. 

Sean: We, we'll, just, I think it takes a long time to develop that, uh, as a professional, I think it takes a long time to develop that kind of instinct.

Yeah. Right. Where you realize, or you just know it, it now is not the time. Right. Because, I mean, you know, you try to push someone past their limits. First of all, they can break down. Right. They can, they can really, you know, it deals off, withdraw from the process. Yeah. They can. Uh, but, but also, I don't think you get the best information when they're in that space.

Wes: This is a perfect segue. Mm-hmm. And I'm not cutting you off because it's so relevant is in your line of work you do often these 90 day sprints. Yes. Right. And so I think it's, there's a reason for that. Mm-hmm. 

[00:43:31] Introduction to 90 Day Sprints

Wes: And I wanted to ask you about the 90 day sprints and the, the psychology behind that and you know, generally how that works.

Sean: So Yeah. I mean, if you accept, and I, I think you would, right? If you're, if you're listening to us talk how complex, how many dynamics there are to manage, how many sort of moving parts, so to speak, of, of this process. 

[00:43:52] Ideal Timeframes for Planning

Sean: I think if you said to someone, because often owners will say, uh, what's the ideal timeframe for me to do this planning?

Like, what should I expect? Mm-hmm. For some reason, everybody answers the question in the same way, but I don't think there's really any data behind it. We say three to five years is really kind of ideal. Right? Right. If you wanna do it well, three to five years, I think it's pretty situational. Right. And I think, I think if an owner has that amount of time, if they want to take that amount of time, then it makes sense for them to take it, to do it well.

But you know, as well as I do opportunity, you have to be opportunistic, right. You have to be agile. So, but if you're gonna put a plan, if you're gonna put a good plan together, you kind of know you need 'em, put a stake in the ground. Right? I need to know whether they're on a two year timeline or a five year timeline.

I can't put a good plan together if I don't have that. Yeah, yeah. Idea, right? Of how long we have to work on. 

[00:44:42] The Importance of Short Cycles

Sean: So, but if you go to someone and say, let's put a plan together for a three year kind of thing, they might say, all right, I kind of know where I want to end up. But if you don't chunk it down into discreet, relatively short, uh, sort [00:45:00] of, you know, sprints, we call 'em that for a reason.

I actually think that people have the ability, if the, if the project is well-defined to really bear down on one thing that matters in value building at that time. I don't really like to work on five things at once. Mm-hmm. I like to bear down on one thing and do that for 90 days and see tangible results.

Those bookends are really important to the owner and their teams. Right. Because they'll work really hard. They're not, these are not lazy people by any means, right? So we can tap into that work ethic, but nobody wants to be waiting around for a year to see results. So you have to design the program so that it delivers tangible and intangible benefits on short cycles.

[00:45:49] Implementing 30-30 Cycles

Sean: So one of the things that we do, even within that 90 days, and I think this is a really good thing for a lot of businesses to just practice, to kind of build capabilities around, is we use something called 30 30 Very simple idea. So we're going to establish. Collaboratively, what matters the most for the next 30 days during this 90 day sprint.

Mm-hmm. And we're gonna say, we're gonna accomplish these two or three things in the next 30 days, whatever they might be. Everybody agrees to that. 15 days in, we do a little check-in, right? How's the work going? Are we gonna make our 30 days? People might say, having trouble with this, having trouble with that.

Or somebody who's supposed to get something else done before I could do my job, whatever it might be. We know how this, these kinds of things goes. 

[00:46:32] Evaluating Progress and Agility

Sean: We, we've all been there, but at the end of 30 days, we're looking back and we're saying, how'd we do? Mm-hmm. Uh, anything changed? Do we need more agile? Because it, the line is never straight, right?

Mm-hmm. This is not just kind of a dirt we're gonna end up over here. If we just kind of plow through it, you're gonna have to walk around obstacles. I mean, it's kinda like a, you know, water flowing down a river. You can set the boundaries, but you know, the river kind of takes its own path in a sense.

Mm-hmm. So, so those 30, 30 cycles get people working. First of all, it gets them tuned into agility, the necessary agility for doing this. And second, they can say, oh, in the last 30 days we accomplished those three really important things. Check, check, check. What's gonna happen in the next 30 days? So we're always looking forward 30 and back 30.

If we find that the 30 day sort of goals, if you will, deliverables in a sense. 

[00:47:27] Addressing Systemic Issues

Sean: We just keep that, that the team just can't get it done. There's an, there's an opportunity, I think, to stop and say, okay, what's going on? Mm-hmm. Like, we're not, we're either, we're just not getting there repeatedly. It could be systemic.

It could be that we have somebody on the team that's kind of being a black hat. A saboteur could be, we picked the wrong goals. It could be we took, picked too many. 

Wes: Mm-hmm. 

Sean: Right. So you calibrate, but by the end of 90 days, let's say you're working on strategy for 90 days. Then by the end of 90 [00:48:00] days, everybody should be sitting there going, we have a strategy.

Right. We know what needs to happen in the next year. Mm-hmm. We have a bullseye that we need to hit. We know what our success factors are. We know what our risk factors are. We have clarity throughout the organization on why we are doing it, what we are trying to accomplish. 

[00:48:19] Defining Strategy and Success

Sean: The strategy at the end of the day, just has to answer two questions.

Where are we going and how are we gonna get there? If there's clarity around those two things, everything will fall into line. Mm-hmm. 

Wes: If you don't 

Sean: have clarity on those two things, you don't have a strategy that simple. So, you know how many books have been written on strategy? For me, it just comes down to very simply, where are we going?

How are we gonna get there, period. Keep it simple. So those 90 day cycles and the 30 day cycles within help people build teams, they build rapid problem solving skills. 

Wes: Mm-hmm. 

Sean: They build agility, they work through it together. They run into something. At the 90 day mark, they can look back and go, let's do that again.

Wes: Yeah, 

Sean: that was, and we're gonna get better at it the next time around. So that just kind of creates a exponential kind of, you know, rolling effect, right? Yeah. We can build, it's a sort of a yes and right. Yeah. Yeah. What's next? Um, so I just think as a technique it's uh, more effective to kind of keep it on those short, short cycles.

[00:49:26] Balancing Work and Rest

Sean: It also gives us the opportunity to say, that was really intense. We got a lot done, but we're kind of tired. Yeah. Right. So let's stop, let's take a break for 30 days, 60 days or whatever, and then we'll leap into another 90 days. 

Wes: Yeah, 

Sean: that's okay. 

Wes: So Sean, if you did a, a traditional, let's say a three year engagement, you know, value growth, manager engagement, and you did 90 day sprints, how often, like, what would be the average sort of rest period, if you will, between the sprints you're doing 90 days on, 30 days off?

I mean it, I'm sure it depends on different factors. It does you, but in, but just kind of curious what that looks like. 

[00:50:04] Value Domains and Interrelated Factors

Sean: We have what we call value domains that we live in to build the value of an organization over time. So there are things like culture, mm-hmm. Leadership, right, the ability to manage risk, uh, strategy, what we call company of the future.

Sales and marketing, financial acceleration. Mm-hmm. Right. Leadership. So, so whatever's happening in those 90 day sprints is gonna be related to one of those domains. Not multiple domains, but you have to keep in mind they're all interrelated, right? So, yeah. You can't have good culture without good leadership.

Right. Uh, you can't really have good, uh, strategy without the ability to manage the risk that is inherent in strategic execution. So all of these things, I always describe this whole, the way that value domains sort of fit together and, and really [00:51:00] the, the process of building value, sustainable value within an organization.

If you look around your living room, for instance, at all the things that are in the living room, all the pieces of furniture, lamps, books, whatever it may be, and imagine that there's a complex web of invisible strings that connect all of those things. If you move a book, then a lamp might fall off the table over there.

So it's, it's holistic ecosystems of value that are all linked together. So when we design a plan, we're essentially saying, okay, within company, in the future or within risk, we're gonna work on one risk, for instance, rather than half a dozen of them. So let's work on owner dependency mm-hmm. For 90 days and see if we can lower the temperature.

Yeah. Right on that one, which is gonna have a huge effect on value. That is like, yeah, sure. The most persistent value killer. It For most smaller businesses that, you know, we, we can judge, we want it to be tangible. We want it to be tied to a value gain that we can prove. So at the end of 90 days, we'll assess that, right?

And then we let the client make the call mm-hmm. On whether they need to rest or whether there's something else that they wanna work on at that time. 'cause 90 days might get you 25% of the way. Mm-hmm. To perfect, so to speak. Or it might get you further than that. But again, checking it the end of 90 days and say, first of all, we can be proud of what we accomplished in the last 90.

Here's what we have left to do. We can spin right into it. Or they may say, well, you know what? Our largest customer is kind of all of a sudden, uh, thinking about doing business with somebody else. We need 30 days to rectify that situation. Yeah, right, right. All hands on deck, they're absolutely right.

Mm-hmm. That's what they should be doing at that moment in time. Mm-hmm. Yeah. If I say do that, but you got all this other stuff to do, what do you, what kind of result do you think we're gonna get? The conditions, the conditions must be right. You must set the right conditions for value acceleration. And if you don't, if you've got something like that going on and you try to force fit Yeah, sure.

Value growth into it. Chances of success are not good, and it doesn't take very much under performance on the value growth side. For people to kind of lose faith in it. Remember, most folks, most folks in organizations already have one job when the owner has an absolute vested interest in growing the value of the company, right.

The value of their equity. But everybody else in the company doesn't have an absolute, uh, vested interest in the way the value of the equity because they don't have any equity. Right? So for them, some, I'm some guy, my, you know, me and my team are coming in and basically saying, Hey, this is really important to the owner.

Wes: Yeah. 

Sean: Uh, uh, but we need you to do a whole lot of work more than the owner in [00:54:00] most cases. Yeah. We need you to do the implementations. And their response can be, why in the world did you just make my job harder? 

Wes: Mm-hmm. 

Sean: Right? And you're gonna come in here. Thanks a lot. You know? Yeah. 

Wes: And you're making how much?

Yeah. 

Sean: Yeah, yeah. And so we have to have a conversation with the owner about, alright, how are you gonna incentivize your team to participate, to participate in this process? A lot of people kind of get, uh, find the, what's in it for me, conversation off-putting. But I think first of all, it's legitimate, right?

Mm-hmm. That it's humans. We as people get to ask that question, it's not a greedy question, it's actually an ambitious question. You want your people to be ambitious. You don't want them to be selfish. You don't want them to walk over other people in order to get where it is that they want to come. But you do want them to be motivated.

And if they are saying, if you can give me a motivation to do that, if I can see the win for you, the owner for the company, and for me and my team, whoever it is, if I can get all that lined up I'm in. If, however, you're just giving me a second job and all of the benefits are accruing to you as an owner, that process is gonna break down every time.

Right. Because you just haven't gotten the alignment that you need. So a lot of owners will say, well, okay, what do I need to do? And, and you know, it could be, let's put a long term incentive plan in place. Let's do some creative things with, you know, non-qualified deferred comp. Highly technical conversation, right?

But let's bring people in to educate you and see if it's something you wanna do. A lot of owners talk about phantom stock or stock appreciation rights, that kind of synthetic equity. 

Wes: Mm-hmm. 

Sean: There are other ways to do it, but at the end of the day, if the owner says, this is great, I definitely want to do it, and just, I'm just gonna tell people that they have to right?

And that, and that's a no. Then my response would be, we are not setting the conditions for success. I need you to stop and think about this. I'm gonna challenge what you just said and we're gonna talk about it. 'cause there are ways to do this that are not extraordinarily painful. And if everybody believes in the future of the company and their own future, that's actually good for your culture.

It also helps you as an owner. The, the company is now not as dependent on you as it was, and I need that owner to get as far away from the operational action, honestly. Mm-hmm. As they possibly can. Mm-hmm. That's also, by the way, it's not just the emotion of potentially exiting the business, it's also the emotion of potentially exiting authority.

Right. Because they're, I've had owners say, well, if the business isn't dependent on me, then I'm no longer relevant. So it doesn't really matter. They're kind of exiting a role mm-hmm. Through this process. In addition to potentially exiting the business, again, an identity change. 

[00:56:58] Professionalizing Management in Family Businesses

Sean: They're the founder, they're the [00:57:00] CEO in general, multi-generational success in a family business, the ability to pass it on to the next generation depends on professionalizing management.

By the second generation, almost all long, like six generation businesses, sixth generation businesses in the world, there are, generally speaking, Dennis, Dennis, uh, Dennis Jaffe, who's a worldwide expert in family business, uh, and consults with some of the biggest and most complex family enterprises. He did a study on 100 year families in business.

Uh, a lot of 'em beyond that, so they were, they were six generations in, and what he wanted to find out, he was curious about, were there characteristics right. That existed for in all cases? Or was it just kind of a mishmash of stuff and he kind of created a matrix, but, but, and there were things that showed up, but not in all situations except two.

And in every single case, those businesses, those families had done two things. By the second generation, they had professionalized management with non-family professionals, and they had a board of directors, which had a fiduciary role in the governance of the business. Not a board of advisors. Mm-hmm. But a board of directors that had a majority non-family independent directors on it.

Very interesting. So what do we, what do we learn from that? First of all, pretty early in the process, they were willing to give up authority to people who were probably technically more mm-hmm. Proficient than they were in key roles in the business. So they were open, they were also open to independent directorship as a governance feature, real governance, right?

Mm-hmm. They were open to having more independent directors on their board than they did family members, which is extraordinary in some ways. So they were open to outside advice in almost every situation that really helped 'em build the family enterprise. That fascinated me, honestly. Yeah, because Absolutely.

I think family businesses in general, they want the legacy, right? They want it to last a long time. Yeah, of course. Maybe it can't. Maybe the option of passing it on the kids isn't possible. But what those folks were saying is, this isn't necessarily about us running the business. This is about us keeping it in the family.

Two different things. Running the business as an active participant and keeping ownership fine. That's one version of it. But these families were essentially saying, this is an asset that we care about and we want it to be a legacy asset. We know it's gonna be more valuable if we have people, the best people possible, doing these jobs early in the process possible.

Mm-hmm. And that might not be us, but we're gonna build, we're gonna do the things that we need to do. We're gonna be intentional about it. We're gonna do the things that are gonna make it more valuable, but we're gonna keep ownership. So they converted. They very intentionally went from family, lifestyle, business [01:00:00] to value creating enterprise.

It's an intentional jump. Doesn't happen 'cause the business gets bigger. I've seen $50 million businesses that are still lifestyle businesses run on income. Mm-hmm. So they said, we're interested in becoming a value creating enterprise, and we don't have to be the people who make that happen. So they became passive, more passive equity holding, uh, families, and they passed that as an opportunity onto the next generation.

What did they do there? They all unlock the potential of the family because wealth then moves between the generations. But if you have a grandkid, instead of saying to the grandkid. Uh, hey, are you interested in running the business that we started? And the grandkid says, not really. Yeah, no. What do you do?

But if you've moved wealth from one generation to the other, you haven't necessarily given up the, let's call it the Uber, right? The her business, the first one that generated that initial sort of wealth for the family. But if that wealth is moving, then you can say to that grandkid, do you want to be a business owner?

Do you, are you interested in entrepreneurship? And maybe they say, yeah, I really admire what you've done. I just don't think I'm the right person to own or run that business, but I'm passionate about these things. The family kind of becomes its own sort of internal private equity operation, right? Where now they can say, okay, what are you passionate about?

Mm-hmm. Right. Well, I really love the idea of doing this. Good. We'll put whatever. We'll be your seed investor. We want you to do the things that you're good at and passionate about. The family wealth builds, the family enterprise builds it's community standing. It's community. It just becomes a different animal altogether.

Personally, I think if a family, um, looking, every business owner is a family business owner, so. Uh, they're a family in business. Mm-hmm. Right. So, so if you take that viewpoint that we don't actually have to run the business in order to own the business, and this applies not just to us in the present generation, but also is a principle that we're comfortable following into future generations.

You can continue to be a family in business and probably a bigger, wealthier family in business if you just embrace the fact that it's not really about running it, it's about owning the legacy. Mm-hmm. And making that the centerpiece of the conversation. 

[01:02:24] Psychological Ownership and Generational Transition

Wes: So Sean, we talk about, you know, continuing this theme of, of exit planning and, um, oftentimes dealing with partnerships or family owned businesses.

Um, there's a concept that I've read about that I would love to hear your insight on called psychological ownership and what does that mean in the context of a family of business and how helping, um, an owner, founder relinquish control Yeah. Um, you know, within the business and the identity and all those things and 

Sean: Yeah.

You know, 

Wes: would love to hear more about that. 

Sean: Well, when you've founded a business, I think you immediately take psychological ownership for it, right? Sure. It's a natural part [01:03:00] of, of founding a business. You can't avoid it. You can't actually make it a valuable business without having that psychology. Right.

We can get too attached, there's no question. Mm-hmm. So that's part of the weaning of the identity, understanding how. It's not all about the business, you gotta have a well-balanced life, right? So, so I think you, I think you have to be really self-aware to a certain extent about whether psychological ownership of the business has turned into psychologically obsessive ownership of the business, right?

Mm-hmm. Just degrees here. Mm-hmm. But let's put this, I think in terms of the next gen, so, so let's say that a, you know, a, uh, the founder is the first gen and, you know, somehow they're planning to pass the business on, keep it in the family and pass it on to the next generation. There have ideally been conversations between the two generations that, that is the appropriate thing to do.

In other words, when the, when the business is pitched to the next generation, they actually want to catch it, right? And they feel like it's something that they want to do with the rest of their life, potentially with the intent then of maybe passing it on to the third generation. We know that very few businesses, at least in the United States, there's a little bit better record outside the United States.

Most businesses in the United States don't really make it past that second generation. You make it to the third or the fourth generation, you're really pretty rare verified error. I mean, you're down to a fraction. So, but that, that transition from first to second generation, honestly, in my opinion, should be easier than it has been.

We should have a higher success rate, and I think the second generation. Honestly has been blamed for the failure of these businesses at the, at that point, and I think maybe unfairly so for a number of different reasons. So it does happen, it does happen that the next gen, that that second generation just kind of blows it for whatever reason.

They may not be well prepared. Maybe they don't take psychological ownership of the business. Maybe they just, maybe they just didn't want to tell dad or mom that they didn't want it. Right. And it was a conversation they never had with a lot of assumptions in it. So, but I do think there are a lot of things that need to span from one generation to the next in order for one, the first generation to kind of be able to, sorry.

Bless you. Sorry. The, the, the first generation to be able to let go Right. Of an, a very important identity that we don't want to diminish that, but to help them let go of it. They want to know that they're passing on to a, to some people that they can trust mm-hmm. With this precious thing that they've built.

They, um, and they're really, I don't think gonna give up the identity until that's present. So they need to trust the kids. That's important. If they don't trust the kids, you gotta have some difficult conversations. 'cause you can't, you shouldn't pass the asset on somebody that you don't trust. 

Wes: Yeah. Yeah.

Sean: You should pass on more value than risk. [01:06:00] Right. So every parent or whoever, whatever that relationship might be, surely wants to make sure that what they're passing on to the next generation is in fact. Going to set them up for success. But if they are stuck in that identity, if they're holding onto that identity, what typically doesn't get spanned over, if you will, from one generation to the next, is authority.

And it shows up in a lot of different ways, but it's super toxic if you say, okay, ownership is passed to you, but the authority to actually do with the business. What you want to do with the business is not there. I'm going to, uh, continue to be a consultant in the business for the next five years. Right.

Or which may be okay. Yeah. But or I'm gonna be chairperson of the board. Right. And what that really means is I'm actually gonna maintain operating control of the business just from kind of beyond the grave, so to speak, beyond that transition. So what happens to the next generation? They are stuck in what I would call custodial ownership, which is that they don't actually own the business.

They just kind of are custodians of mm-hmm. The value that has built in the predecessor generation, the predecessor generation is built, which may in fact not be the greatest value that could have been built or will be built in the future. So the resistance of the predecessor generation to actually span everything that needs to over the next generation has probably impaired the value of the business for a good long time.

And it certainly. Has put the next generation into the position where they are living somebody else's life, they're actually living the life of their previous entrepreneur. Now, I don't know how I would take psychological ownership if I was put in that position. Right. I'm there to, you know, custo, I'm, I'm a custodian, I'm just supposed to keep it mm-hmm.

Doing as well as it was doing. And what'll happen, I think, is that it naturally, with that lack of spirit in it, with that lack of energy, it's naturally gonna degrade. And the conversation then is gonna, when it fails, if it does, or when it just kind of goes downhill, the conversation is gonna be out in the community, is, it's a real shame.

Right. So Yeah. The kids kinda ruined it. Yeah. Ran it into the ground. Ran it into the ground, or it's just not doing as well. What a, you know, and that is, that does have some tragic consequences, right? Wealth is being exhausted. Mm-hmm. The family may be fighting whatever. Uh, but I think that if, if, if you are a predecessor generation or a founder of a business, you have to make sure that you have done your part in preparing the next generation for success and setting up the business in a way that they can actually run with it.

Right. And are you gonna let 'em go? Or are you gonna be the jockey on a fantastic [01:09:00] horse that just keeps holding the rein? 

Wes: Mm-hmm. 

Sean: Right. Because if somebody else was riding that horse and let it go. They may win. That might be hard for the founder to watch that the business does even better in the future than it did under their care.

And I've had situations where that kind of envy has turned into a problem within a family in business. 

Wes: Yeah. Right. 

Sean: Um, so there are some really, there's like a really important transition zone in there where a lot has to happen. Some of it is just tactical business related stuff. It's knowledge. But that authority and customer fieldy to one person, generally the founder has got these really important relationships.

Got pass those on and away. You, you have a little box that you really have to do a whole bunch of stuff in. That's why the run up to that zone, that transition zone has to be really carefully thought through. I mean, there's a lot of ground to till 

Wes: mm-hmm. 

Sean: Before you kind of reach the point where you can get that rocket off the ground and, and if it's not done well, I think it just creates headwinds that the next generation fights and fights and fights.

Yeah. And there's a certain amount of exhaustion that comes into play. If you think about passing on the third generation, I think the second generation is probably just gonna be exhausted at some point. Yeah. Because they will, there've been so much sort of, they, it is gonna feel like they're walking in mud.

So, so I think that ownership thinking and entrepreneurial spirit art. Aspects that can be passed on to the next generation with good preparation. And if they don't have it, you shouldn't pass it on to them. You should figure out something else to do. Don't force fit it. But I do think you have to give that next generation the ability to actually be entrepreneurial.

You have to get out of the way, 

Wes: hand over the reins. Right? I mean, you gotta give 'em the opportunity to fail. As hard as that might sound to even hear, I would think. Yeah. To get 'em an opportunity to. 

Sean: Well, and to be fair to the founder generation, the predecessor generation, the second generation should be extraordinarily grateful for what has just been passed onto them.

Sure. I mean, if you're a startup entrepreneur, you would give your, you would give your right arm and possibly more to have what you've just inherited. Right. A balance sheet, a set of customers. Mm-hmm. A reputation, a brand. Right? Sure. Processes in place. You've got something that you can build on. But if the assumption is that you're not actually gonna build anything more innovative than it's already been built generationally, that younger generation probably has more te knowledge in their young lives.

Right? Right. By a factor of 100 than the previous generation has built up in 60 or 70 years. So if you take that skillset around technology, understanding technology and how it, how it can drive process and culture and [01:12:00] you let that run, yeah. They're gonna make mistakes. So did you. Right. Mm-hmm. Set it up so that the mistakes that they make are not fatal, but don't restrict them from making any mistakes at all.

'cause then, I mean, they're a human in the world that can survive that expectation. 

Wes: I'd imagine some of what you learn and are able to achieve in working with business owners are a lot of one-on-one meetings. Oh, very much. Right? Like you meet with them together then Yeah. You, I'm guessing you learn so much more separating 'em into different rooms and having conversations.

Sure. You know? 

Sean: Sure. Well, there's, there, there's an aspect of creating kind of a safe space, if you will. Right. A kind of psychological safety around having those conversations. But, you know, years ago, honestly, someone, uh, a very good, uh, business coach who has since passed on named John Lazar. He, he taught me the term missing conversations.

So I hadn't really thought about it that way. Right. You, you sort of talk about what's not being said, but that's a little bit different Part of what you have to do, I think as a good business advisor, first of all, you just have to deal with the psychological part of it, right? Mm-hmm. Yeah, sure. You, you can't ignore it in these situations.

Yep. But being able to identify and engage those missing conversations, right, among family members, among professional team members, whatever it may be, is an enormous, it's just an incredible skillset if you can learn how to do it. Because essentially what you're doing is you're, you're, you're just making it possible for, uh, them to say things in a safe, productive way that they have felt like they've never had the ability mm-hmm.

Or the space to say before. So yeah, sometimes it is one-on-one, sometimes it's in the middle of the night. Sometimes it's getting called by the client who's on his way to work at four o'clock in the morning and had a panic attack. I had that happen more where, you know, one of our longest clients who recently sold this business as a matter of fact, called me at 4:00 AM my time and said, I'm in the car and I'm having a panic attack.

Because we were in the process of kinda reconfiguring the leadership team, uh, and leadership in general within the company because it was still too dependent on him, and he was feeling that surge of what's gonna happen if I'm not in control, right? Mm-hmm. That was his panic. He was like, I, I founded it.

I've built it. It's much bigger than he ever thought it would be. I never dreamed that it would get this big, but I'm having trouble giving control to someone else. I trust him, I think. But I just, I'm, and I said, okay, stop the car. I want you doing this while you're driving. Mm-hmm. Pull over, pull off, whatever it may be.

And let's start to kind of unpack this very [01:15:00] natural thing. This is not you and 98% of every business owner on Earth who has gone through this process probably felt the same thing. So let's get that out of the way right away. Mm-hmm. Right. There should be a support group for this 12 step program for exiting business owners.

So, so for him, just having somebody who would be neutral Right. Who knew a lot about the business mm-hmm. Who understood what he was trying to accomplish, to be able to pick up the phone and kind of be vulnerable was, he didn't have that with anybody else. And he knew I was gonna tell him the truth. Yeah.

That was important. Right. But I always ask permission. I always ask permission to tell the truth. I always ask permission to press them, to have missing conversations with, with themselves, with family members, with other people, because at first they're gonna be really uncomfortable doing it. Mm-hmm. But you know, it's, it's interesting.

In our conversation, honestly, I'm being reminded of and realizing how much of the psychological we deal with in our business advisory work. Yeah. Because some of our work is just pretty darn tactical business stuff, right? Yeah. Like, let's get better financial statements. 

Wes: Mm-hmm. 

Sean: Honestly, even though.

Building a good financial statement and potentially going back and correcting past financial statements that haven't been so good. Necessary part of the process. Probably the easiest thing we do, honestly. Yeah. It's a huge value driver to have good financial statements. Yeah. 'cause it tells you a lot. Um, but they're not that hard to fix unless they've really been a mess.

Right. Forensically you can go in and reconstruct 'em. Yeah. With a good team, the, the human aspect of all of this is what I've learned over the years will make or break the work. 

Wes: Wow. 

[01:16:51] Managing Risk Profiles Across Generations

Wes: Uh, continuing along this sort of subject matter, but we talk about differing risk profiles amongst the generations. Yeah.

How do you manage those different risk profiles between the, the older generally more conservative generations versus the younger, perhaps more entrepreneurial generations, more technologically savvy, different maybe world outlooks. Yeah. Um, work life balance versus, you know, all of these maybe my identity through my name being on the building and Yeah.

You know, just how do you manage that? 

Sean: Well, first of all, you have to see it, right? So I think I, my experience has been that even though people I do think become financially, maybe fiscally, maybe even socially more conservative as they age, I. I don't know that that's necessarily a given. So I go in with absolutely no assumptions around that, right?

Mm-hmm. Yeah. But being able to talk about it and kind of assess where people stand on it is really important. So we're gonna ask questions about risk [01:18:00] profile, right? In the same way that a financial advisor, your investment advisor would say, tell me about your tolerance for 

Wes: risk. Mm-hmm. 

Sean: Right? We're not prioritizing one over the other.

One of the things that we always say is, and I've been in situations where I vehemently disagreed with the value system of one of my clients. Now I'm not gonna work with somebody who's abusive mm-hmm. To their employees or abusive to our team. I've actually fired clients for being abuse, abusive to people on our team.

I don't wanna work with people who listen to us. 

Wes: Mm-hmm. 

Sean: Right? So if someone is really kind of a bad actor, then we're gonna, we're not gonna do business with them, or we're gonna terminate the engagement. But different families or different, you know, owners have different value systems. It's not for us to judge those things, but they do create opportunities and constraints that affect the work and the outcomes of the work.

So I think one of the conversations that you have to have when you see people who have different kind of risk profiles, right there, the conversation has to be, what does that actually mean to you? Right? Why? Why are you in this? Place. Is it what you would consider to be a permanent view of risk in the business and risk for you as a business owner?

Or is it a point in time you just happen to be at a place in your life where for whatever reason, your risk tolerance has gone way down? I think it's natural for younger entrepreneurs, right? Whoever they may be to want to take chances. The older entrepreneur did. Mm-hmm. When they were younger. One of the reasons that I think people become less risk tolerant less, for me, that's not really a question.

That's not necessarily a question about risk tolerance. It's a question about innovation tolerance. It's a question about change tolerance, right? Mm-hmm. So I would want to just kind of explore that and reframe it potentially, because most of the time when the older generation says, I don't want to take any risk, it means just keep doing what we're doing.

It's been working, right? Don't break, you know, don't fix it if it's not broken. But it's also in the, I really am at a point in my life where I don't wanna manage a whole lot of change right now. Mm-hmm. Whereas the younger generation may be in the, it has to change in order for it to be more creative, more innovative, to refresh it, to give customers what they are saying they want.

So the conversation actually, I think when you start to ask and navigate, it ends up in a different place than. This generation is naturally different than this generation. I've seen situations where the, where the younger generation maybe wasn't sufficiently risk tolerant to actually grow the business.

Maybe they went in mm-hmm. You know, uh, with, with a more conservative view of where they want to take it. But what I would say is that no matter what the different risk tolerances or change [01:21:00]tolerances of the various, sort of the two different generations, or let's just call it two different owners, right?

Two different owners, two different operators. It's always good to talk about and try to get alignment. 'cause nothing's gonna, nothing good is gonna happen. Right. Without good alignment. 

Wes: Mm-hmm. 

Sean: We find, you know, it's really interesting to work on partnerships, family or non-family, where there's a big difference in age.

'cause if you think about it, let's, let's say that, uh, you know, the, let's say you've got one 70-year-old, right? Well, they're thinking about, they're not wanting to put money back into the company necessarily, right? They want to take it out, right? Mm-hmm. Where if they have a partner that's 50, that 50-year-old is probably not really all that interested in exiting yet, right?

Mm-hmm. And they're, they might be willing to reinvest in the company. What does that mean for the transfer of equity at various sort of life points for those folks? I think you have to take that into account, and I don't think it necessarily is the 70-year-old that drives the answer to that question.

Mm-hmm. Even though what they think matters. Right. So you can't really, I've, I've never, it's very difficult to grow the value of a business if all the capital is just being stripped off the balance sheet. Yeah. Right, right, right. That's actually a move backward. That's a move from value creating. When you are saying to yourself, I'm definitely gonna build something that has value, more value, more value, wanna build it over a period of time, you're not, you're not sacrificing a living.

Right. You're still taking money out of the business. As it becomes more valuable, you should be able to take even more back, uh, out of the business 'cause it's gonna be doing better financially, cashflow wise, all those kinds of things. But, but if you are running a cash, uh, a value creating business, if that's your intent, you're gonna reinvest in it.

And one of the ways that you do that is you buy the best leadership team that you can. Mm-hmm. So when I see an owner dependent business, I usually see underdeveloped leadership or absent leadership when I trace it back, I don't find necessarily that the business couldn't afford to hire a CEO or a COO.

Right. They chose not to. Yeah. 

Wes: Right. 

Sean: They made the decision to take income rather than reinvested in the business. So there is a point where taking money out and putting money in. You've got two different partners who see that separate, uh, in different ways, you have to reconcile it. They cannot live together.

Those two things cannot be true at the same time. So that's a really important conversation right around what are we trying to do here? If the older owner starts saying, Nope, I'm taking it off and taking it off, they've actually shifted backwards from value creating to lifestyle thinking. 

Wes: Mm-hmm. 

Sean: Can't blame 'em.

I don't know that I would want to take a huge amount of financial risk when I'm 70 or 75, but that's a conversation. If you got a 20 year difference in partnership, that's a conversation [01:24:00] that should have taken place 10 years ago. Mm-hmm. To talk about what is this scenario gonna look like when you're 50 and I'm 70.

Right. Because I'm gonna be ready to, 

Wes: that's such a critical decision that we see so often, regardless of the reason you're, you're mentioning one of the potential reasons where the sort of unequally oaked partners, but that decision and that mentality to distribute profits rather than reinvest them in the business.

Yeah. Whereas it's frustrating to, for me to see, and I'm sure it probably is for, uh, for you too. You know what that ROI is Sure if it's reinvested properly. The ROI beats most often. Any investment that you've, you know, contemplated and. We see it sometimes even in the m and a process, sometimes we'll make a recommendation, Hey, I think we should get a quality of earnings report done.

Yeah. Because that's gonna often demonstrate that we're actually making more money than we thought from an a gap accrual standpoint. 

Yeah. 

And we never, and Dan, my partner and I like to always say, well, I don't care whose money it is, we don't like to waste it. Yeah. So we're not gonna make a recommendation just for you to spend your money if we don't really believe that.

Yeah. It is at least stands a chance of getting a really strong ROI There's no guarantees in life. Right? 

Yeah. But, 

but, um, you know, so that's a frustrating thing to see. You see those lifestyle businesses and it doesn't really take hard, it, it's not really hard for you to judge and, and observe that. Right.

You can, you can look at a balance sheet, you can look at the website, you can look at the facilities, you can look at the equipment and go, you know, it is a business. It is making money, but it's not something where there's a lot of pride of ownership. And, and again, like you kind of said, it's not a judgment thing.

It's just you want this, but you're not willing to do. What it really takes to get you there. Yeah. Which is oftentimes some sort of reinvestment in the business, whether it's a leadership team or you know, an advisor or upgrading equipment mm-hmm. Or software or those things, and Exactly. Hey, no, we've made it this far and made it much money, you know, fat, dumb, and happy.

Okay. But I don't know if we can get here. Yeah. You know, if you're gonna just keep pulling outta the business and Yeah. You know, that's, that's, that's something that you see for sure. And, um, it 

Sean: is, I, you know, I think, uh, the, the light bulb that goes off for some business owners, I wouldn't say all, is when we say it goes back to that kind of decision context we were talking about earlier.

When you're, when you're thinking about these things, you make decisions that you evaluate potential scenarios differently. Mm-hmm. Right. I could go this way or that way. Right. It's gonna build value, let's go that way. Which means that in some cases, at least not with, not, you're not gonna bottom out your finances in order to do these things.

Mm-hmm. But if somebody said, all right, I make a million dollars a year off of my business, but I can, I, it would really, if I'm thinking about building value, I, if I invested this year, if I invested 250,000 in a CEO, what does that do for me? [01:27:00] Pulls my, yeah. I'm not as owner dependent. If your business goes from being owner dependent to not owner dependen.

You probably pumped the value 40% on the day that you, let's call it fire yourself. 

Wes: Mm-hmm. 

Sean: Right? The day that you say, I have built a business that no longer needs me, I'm fired. 40% bump in enterprise value right there. So let's say you spend 200, let's say your business is worth 10 today and with owner dependency, and you can make the argument that a highly under owner dependent business is not a sellable business.

So it might be worth 10 on paper and zero in the market, right? But, but let's say it's really worth 10 and you've got a good shot at transfer, but it 10 isn't enough. 'cause your financial plan says you can't do this with 10 sounds like a lot of money, but you're 60, you can live a long time cost of money.

It costs a lot of money to live a long time in the United States. Yeah. Yep. So ten's not enough. You need it to be 15. Okay. Uh, our question, the question for us as value advisors, our charge is find the other five, right? 

Wes: Yeah. 

Sean: And make sure it's transferable when we get there. If I could, if, if you're owner dependent at 10 and we can build the program that gets you to highly owner independent, right?

Wes: Mm-hmm. 

Sean: Then I just added 4 million to your business that day and it costs you 250,000 to start that process. Now, to your point, I'm in control of the value of that asset. Unlike investing in the open market. Now I am building an asset that's extraordinarily liquid. So let's be. You know, realistic about, it's gonna be hard to get that value out potentially.

So that's an aspect. But 250,000 a year to get 4 million probably within a year, a year and a half is probably a good investment. Yeah. But again, value creating versus lifestyle. I should make clear, I don't have anything against lifestyle businesses. 

Wes: Yeah. 

Sean: It's just a choice. You're gonna act one way. If you're in lifestyle mode, you're gonna act in another way.

If you're in value creating mode. One way that we get our clients to think about value creation is just to change the perspective a little bit and think we just, we just say, think about your business through the eyes of a buyer. If you stand back and say, all right, I'm just gonna tell, I'm gonna try to be completely unemotional about this thing.

Mm-hmm. That I've spent my life building. Just gonna take a flint hard look at this thing. You'll find stuff that you don't like, but you'll also, that change in perspective, all of a sudden you're gonna start making decisions differently because you will say, you will say in that situation, a buyer would be a whole lot more comfortable buying this business if I had a good CEO in place.

And if it wasn't dependent on me. Because if I run out of this and, you know, something happens to me tomorrow, if it doesn't run well, nobody buys it. Yeah. Or they buy it at the discounted value of the assets on the balance sheet, which isn't gonna be a good story. So it's just so important to change [01:30:00] the perspective, just that little bit, step back.

Mm-hmm. And look at it to the eyes of an investor or a buyer. It's not, it, it's, it's not a, it's not a magic trick by any means. It's just a change in perspective. And I think sometimes when I, when I talk to owners about that, it's like a light goes off when you use that sentence and all of a sudden they understand very clearly the difference between lifestyle, business, decision making and value creating decision.

Wes: Mm-hmm. 

Sean: I've never seen a business that wasn't owner dependent without a good leadership team. If the good leadership team isn't there, I can guarantee you the business is owner dependent. 

Wes: Mm-hmm. 

Sean: Those two things live together. Yeah. Absolutely. 

Wes: Families often have, um, especially ones with second gen in the business, active employees of the family on payroll, but often non active employees.

Yeah. Not active family members. And how do you deal with that, that situation, which can be, um, a sensitive topic, I'm sure. Um, and then also upon the sale. Yeah. Right. I mean, you've got non-active family members who perhaps might be expecting something Yeah. Because it's the family. Why would my brother get some, not meanwhile brother or sister working in the business to create value and Right.

There's only so many hours in the day. 

[01:31:21] Balancing Family and Business

Wes: Right, right. I, I, I'm either work in the business and grow value of the family business or. I can be working somewhere else and building my own life. Right. So I'm just curious as to how you feel like it's one of many things about your business that you have to juggle, um, when you're dealing with your clientele specifically.

Sean: Yeah. 

[01:31:38] Unpacking Business Practices

Sean: So, so I think there are a number of different kind of things to unpack, right? In that, in that situation. So first of all, it's pretty natural. Look, every every small private business owner, however you wanna define smaller middle market, um, tends to run the business a little more loosely than you would find, obviously, if the business had public scrutiny on it, right?

Wes: Mm-hmm. Right. 

Sean: And transparency. So, you know, there, there are always things like, you know, second homes and boats and stuff like that, that may be, that may be accept an acceptable way to run the business pretty aggressive tax wise, but it's an acceptable way to run the business. It's probably not harming a whole lot from that perspective, but if you are thinking that eventually you're gonna try to sell it or whatever, you should clean those things up.

Wes: Mm-hmm. 

Sean: Early on. These are not things that you want, in my opinion, that you want to try to explain to a buyer late in the process. Frankly, I think buyers are, private businesses probably have some expectations that stuff like that is gonna be there, but, but like employing family members who don't actually work there, right?

Or, and, and sort of loading payroll a little bit. Once that stuff starts to emerge, like once it's surfaced, my question is how well is this business actually [01:33:00] run? Like there, there's a business practice, ethical considerations aside, and that they're, they are there as a business best practice. That's not one.

Right? Yeah. 

[01:33:12] Tax Management and Transparency

Sean: So, and it, and it's tax management for the most part. Yeah, sure. Right. It's just, you know, we want to get taxable income to zero. Mm-hmm. Well, taxable income of zero, if that's persistent and it doesn't line up with what the financial statements are saying, actually probably works against 

Wes: Yeah. 

Sean: A, a nice value at sale.

Right. Because all you're saying is, you know, we have to add back a million dollars worth of stuff, right. 

[01:33:35] Family Dynamics in Business

Sean: That I've been taking outta the business that never looks, so in the instances where you may have, I, I assume your question might be about you've got, you know, it's a family business and you've got two kids that are working hard in the business and they're getting paid and maybe they have some equity.

Wes: Mm-hmm. 

Sean: Uh, or the promise has been made verbally or otherwise, that since they're working in the business, they're gonna inherit it, right? Mm-hmm. That they're kind of first in line for that ownership. And then you have some kids that are not active in the business and they may be on payroll, but they don't have equity and they're not working hard, but, you know, obviously not working hard on it.

I think the pa it's incumbent on the parents, it's incumbent on the parents to one, do their estate planning so that the, whatever the full value of the estate is taking into account the value of the business. Um, and taking into account liquidity aspects, right? So a lot of owner, a lot of entrepreneurs will say, I'm gonna pass on the business to those two kids that are working in it.

And that's great because it's a $40 million asset. And then we're gonna use our other liquid assets to kind of make up for that, to balance that with the other kids in the family. Well, being a business is risky, right? No guarantee that you're ever gonna get that 40 million that just got passed onto you.

Mm-hmm. Um, the other kids might get investments in real estate. Well, those are pretty open market assets. Yeah. Right, right. I can, I can liquidate those pretty quickly. So I'm not sure that I'm all that happy about inheriting the business and nothing else. 

[01:35:08] Estate Planning and Fairness

Sean: So there's a conversation to be had with the parents around what their intentions are.

It shouldn't be left to chance 'cause that really gets messy, right? 

Wes: Mm-hmm. 

Sean: But they should have clear instructions, a really good estate plan. It needs to fit into their financial plan. The kids need to understand what's gonna happen. 

[01:35:24] Personal Experience with Family Business

Sean: And my, my business and my, my family business, which is I'm the third generation when it passed from my grandfather who owned a hundred percent of it.

My dad had worked in it probably for 30 years at that point, I'm guessing. Uh, and he's a hundred percent owner now. I don't own any of it, but his, my grandfather didn't tell him anything about what was gonna happen to the business, uh, in terms of my dad's ownership. Noah, my dad had two living sisters at that point.

Uh, they were not involved in the business at all. My grandfather [01:36:00] wouldn't tell him whether he was gonna divide the business up three ways, whether he was gonna do something else, like 

Wes: mm-hmm. 

Sean: You know, it, it passed, it literally when he died, it passed to his wife at the time. Uh, and then of course we had life insurance on him, so we used the proceeds of the life insurance to buy her out.

Mm-hmm. And then took the equity back. She got half of the factory, the real estate. So we've been paying half, you know, half of the rent that we pay. It's in a separate company, so she's getting some long-term benefit out of it. And we had it set up, so that would happen relatively smoothly. But the fact that my dad found out that he was gonna own a hundred percent of the business when the will from my grandfather's death was read and not before, was extremely, it was unnecessary.

Wes: Mm-hmm. 

Sean: And, uh, when my dad inherited the business and his two sisters got relatively small cash payments from the will, most of 'em went to his wife. The two sisters were really ticked off and felt like my dad had gotten, taken all the spoils from the war. Mm-hmm. Right. And they had been shut out. And it literally, they stopped talking to my dad, my dad, as the run up to my, my grandfather died fairly quickly after heart surgery.

So it wasn't, it wasn't super abrupt, but it was pretty quick. He was actually starting to look for another job. 'cause he didn't know whether he was gonna inherit the business and he really didn't want to be in a situation where he had a third and his two sisters had a third and he was gonna have to buy them out.

Mm-hmm. He didn't really, nobody had had that conversation. Talk about a missing conversation. Yeah. Nobody had that conversation. Yeah. I, I'll bet you, again, I have no data, but my experience tells me that that missing conversation persists in probably, probably half the time in family businesses. Hmm. It also is a conversation that partners need to have with one another.

Right. Um, if they, even if they're non-family partnership. Right. Um, in any partnership you have to have those kinds of conversations. I, I think it's totally incumbent on the parents to manage that process, figure it out, figure out what they wanna do, talk to their kids about it, explain their logic. Uh, financial planners, estate planners will always tell you in those situations, fair is not necessarily equal and equal is not necessarily fair.

Wes: Mm-hmm. 

Sean: Quite frankly, in my opinion, the business should go to the people that are working in it. And the rest of the folks, maybe they share, you know, somebody gives 'em a bonus or whatever it may be. But those guys that have been working in the business, building the value, deserve to own it if they want it.

And the other folks may not get compensation anymore for a job they weren't doing anyway. That's just the way it goes. But they should hopefully get other things from the estate if they are family members who are sort of in that. However, the estate is organized, right. Not necessarily just children.

There may be other mm-hmm. [01:39:00] Of dividing the estate. What I, what I would say though is that I don't think it's totally fair if family members are working in the business for necessarily equity in the business to be concentrated in, I, I, I kind of have trouble when somebody's working the business as a family member but doesn't have any equity in it.

Mm-hmm. Or some, some stake in it. Yeah. I just, I, there's something that bugs me about that. Yeah. Yeah. So sometimes what happens is, you know, one child, for instance, gets elevated to CEO and they start getting equity considerations that other people that are working in the business aren't getting just by virtue of their position.

Wes: Mm-hmm. 

Sean: Maybe, maybe that's appropriate. I mean, you would see that in a non-family business if you hire a CEO. Yeah. Right. Maybe they get equity as a piece of their compensation, but look, family businesses are really kind of different animals. You gotta deal with stuff in family businesses. That doesn't come up at all in non-family 

Wes: business.

Yeah. Yeah. Mixing business with personal, you know, really I think, yeah. You know, it really is much more personal and family and 

Sean: Yeah. And all of those old stories about, you know, I was offended by that, or, I mean, they just, all those. Slights and maybe conversations that were weren't had Yeah. 20 years ago.

Somehow followed, like just drag along into the business as, uh, Dennis Jaffe. Uh, uh, again, uh, I, there's one, he, he made a statement once that really resonated with me. He said, the business, the family business is the stage where all of the family drama will play out. Right. For some reason it becomes like the locust of all that stuff and it just sort of intensifies and concentrates in that spot.

I'm not sure why. It seems like maybe it's 'cause there's like financial value there. Maybe they're kind of, maybe that's something. Yeah. But for a family and business, that business is so important as a family identity. Right. We're known as a family and business. Right. As a family identity. I think, I think that's one reason why all that stuff is kind of drawn in.

[01:41:14] Governance in Family Businesses

Sean: That's one reason why I really feel strongly about governance in a business that's a family business, especially when it gets to a certain size. I think you have to have a board of directors with real independent directors on it. Mm-hmm. You have to run it like a board because if there is family conflict, if there is inappropriate behavior, whatever it might be.

Then those independent directors respecting the fact that it is a family business, right? 

Wes: Mm-hmm. 

Sean: They're there for a reason. They can help break deadlocks, they can calm people down. You need people who don't get caught up in the drama Yeah. Objective in order to help you through it. 

Wes: Yeah. 

Sean: And, and without that, I just really think there's a point at a certain size and a certain complexity [01:42:00] where family businesses have to deal with things by virtue of the fact that all that drama is potentially being drawn in.

Wes: Yeah, sure. 

[01:42:08] Preparing for Business Exit

Wes: So for an owner, potentially the family business for an owner is not ready to exit, let's call it 10 years. Mm-hmm. 10 plus years. And they're, but, but they're starting to think about and make, making a plan. Yeah. Ensuring that they've got their ducks in a row. Um, what should they be doing right now to build enterprise value?

Sean: I think they should be thinking about the design of the organization that will be the most valuable when they do intend to take it to market or transfer it. So really, I mean, there are some key themes here that keep showing up Yeah. In our conversation. Sure. Right. So what I would do is if I don't have a leadership team, I would start building one.

[01:42:46] Reducing Owner Dependency

Sean: I would start redu immediately reducing anywhere I can find a dependency on me as an owner, I try to eliminate it. Right. I try, honestly, you know, some people say make yourself irrelevant. That's not a very human thing to do. We're not going, we're not going to invest in our owner relevant. So, but find ways to, to, to decrease that dependency right away and just get in the habit of, once you've done that, don't be aware.

It's very easy to sort of take it back. So like, I had it independent and then for whatever reason something went badly or, you know, and I took control of that. We had a client, honestly, I think he had a nervous breakdown, but, but, and looking back on it, I really regretted that. But there was a, there were a couple of very difficult software implementations going on in the business at the same time.

We were helping him with one of 'em on the financial system side. And the production system was being sort of switched over at the same time. It was too much. Mm-hmm. It was too much for the team. It was too much for the company. We had tried to warn him off of it and he decided, he just made the decision it could happen in parallel.

So we did, you know, we did our best. But when he saw the financial, the, the one that we were working primarily on went really great and then, but the production system transition was not going well and it got worse and worse and worse. And he finally, he had a team, he had invested in a leadership team.

[01:44:12] Importance of Leadership Teams

Sean: Mm-hmm. 

Wes: Not 

Sean: super functional, but it was, it was better than none for sure. And the people were diligent and they really wanted it to work, but he got to the point where he just sort of, uh, just seized all of the authority for the project. He took it, he took it completely out of their hands and completely back.

Um, and got pretty darn aggressive about it. Like pretty mean. Uh, people started to leave the company within six months. He had lost every single person on his leadership team. They all left C-F-O-C-O-O salespeople, the whole thing. He found himself in profound isolation. As a result of that decision, the company valued, plummeted for many reasons.

People leaving. [01:45:00] Yeah, keep people leaving. It's dependent on him, so on and so forth. The project started degrade even further 'cause he didn't really have any special skills around software changeovers. So, and then his brother called me one day and he said, I'm really worried about him. He won't come out of his bedroom.

He said, I'm, I really think that he's struggling with this. And he, I, I honestly think he had a nervous breakdown. It made me think, I have to say Wes, it really made me rethink our role in situations like that as advisors because, and I immediately, we immediately started working on an aspect of our practice that we really hadn't focused on, and that was change management, because what he was dealing with, it goes back to that change tolerance piece.

I think what he was dealing with is just an, the enormity of a bunch of change hitting at the same time. 

Wes: Mm-hmm. 

Sean: And, and he didn't have coping skills around that. He didn't like it. He didn't have coping skills. His natural instinct was just to seize and. Just choke the company mm-hmm. With controlling behavior.

And, and at the end of the day, obviously the value of the company and its transferability really suffered. He did end up selling at a huge discount to a private equity firm, and he sold because he couldn't take it anymore. So it was kind of a, you know, what I would say is like a forced sale in a sense.

Yeah. He just ran outta gas and he knew it was affecting his health the whole bit. So I really questioned how could we have helped him with that 

Wes: Yeah. 

Sean: In a better way. And it made us sort of think differently, I think, about our practice, right. And the kinds of things that owners were gonna go through. So I'm a big advocate to go back to your question of what can they be doing 10 year if, even if the exit is 10 years and blah.

Yeah. Invest in reducing an owner independence. Do it systematically and very intentionally. Doesn't mean that you can hire a, you know, leadership team, a C-suite over the next year and expect that dependence is just gonna go away. You have to be systematic about it. You know more about the company as an owner than anybody else will probably ever know.

So that knowledge is valuable. That's your relevance, is the knowledge. Mm-hmm. So build knowledge management systems, build ways for people to get smarter in this world. Use AI as a tool in order to do that. It's really, it's gonna be really powerful for people. If you don't invest in that leadership team and trust them and let them build that leadership culture in the culture of the company.

I don't think you ever escape the spiral of owner dependency if you don't have good knowledge management and training. Mm-hmm. I don't think you ever escape the spiral of Of owner dependency in the knowledge. Yeah. That that value of that knowledge. Knowledge has value. Leverage it. Leverage it throughout the entire organization.

So that's what I would be telling people at 10 years, we're gonna start reducing risk and the major we're gonna start with is owner dependency and all the things that go along with it. If you can solve that little unholy [01:48:00] triangle, right of leadership, owner dependency, knowledge management systems, processes, all the stuff that goes along, it's all part that goes back to that living room metaphor.

Better systems, better leadership, reduce owner dependency, better knowledge management spreads the culture through the whole organization. People have access to the stuff they need to do better job at the time that they need it. They can make decisions on their own. There's autonomy ownership thinking you're sharing in the spoils.

You've created incentive programs. If I'm looking at it through the eyes of an investor, if I'm the guy who has a chance to put my money there or there and that company that I just described as that one and that one doesn't have any of that guess where I'm writing the check even. If that one has better financial performance, even if that one's knocking it out of the park in terms of profit margin, I'm still buying this one because it has a future and that one is unlikely to survive.

[01:48:53] Telling Your Business Story

Wes: You said that key word future, and I think, and I tell this to clients sometimes, and I ask 'em, why do you, why do you think buyers buy businesses? And because I think they get stuck on, well, it's EBITDA times, you know, a multiple, right? Multiple. Yeah. Well, let's talk about that a little bit more. EBITDA times a multiple.

The EBITDA we're talking about is from the past. Yeah. So yes. They look at the past to try to judge future performance. Right? They buy businesses to secure future cash flows. That's right. Right. And so then it becomes a discussion, well, what's the certainty of those cash flows, right? Mm-hmm. Risk. So they really, you say you like to simplify things.

I do too. And I say when they're asking questions and buyers are asking questions, they're all gonna fall into one of two categories. Yep. Risk, yep. And upside. Yep. Right? What is the risk in this business? Can I define it? Can I mitigate it? Can I, do I understand it? If you don't understand it, that's a problem, right?

Yeah. But usually, especially if you're talking about strategic or private equity, they understand the risk. Yeah. And they're asking the questions 'cause they know where the risk is. But upside, how do I grow this business? Yeah. And so when we're bringing a client to market. We work a lot with them to understand their business intimately.

And we say, okay, what, how do we grow it? Because they're, that's gonna be probably the second question they ask. First question's gonna be, why are you selling? 

Yeah. 

And the second's gonna be, Hey, if you had capital and resources, like how would you grow this business? Yeah. If you don't have, if you don't have an intriguing story, I would argue you don't really have that much to sell.

Yeah. 'cause they're not really there to clip coupons. Yeah. Right. Coupons are good. But yeah. Um, you know, and I, that would, it's consistent cash flow. That's great. But usually I find the conversation comes around and, and sometimes that's part of the, you know, that's part of the breakup message, Hey, you know, enjoyed meeting you and your clients and they got a great business and they've really done a lot of great things.

But 

Sean: yeah, we just 

Wes: don't see the growth prospects there. 

Sean: Yeah. And I, and I think, uh, again, we talked about it a little earlier. You can grow a business, you can grow, [01:51:00] grow the top line and the profit margin of the business, uh, and inject a lot of risk into it at the same time. Yeah. Right. Like, like customer concentration.

Right. You go land a big whale and all of a sudden the valuation drops because now 40% of your business is with that one customer. Right. So maybe that's a temporary problem, but Right. If someone starts to question it and you don't have a story around it, like Yeah, we, that was strategic for us, but we're quite aware that we can't maintain that level of customer concentration because it's dangerous.

Yeah. Right. But we have a customer diversification strategy and we're already executing on it. I always tell our clients, if you're gonna, if you're gonna go to market or prepare to go to market, one of the gr the great powers that you hold in your hands as the seller is the opportunity to fashion your story in a way that's compelling to one or more buyers.

Mm-hmm. Right. You can create competition and interest just by how you tell the story, but if you don't take the opportunity to fashion your narrative, your story, at that time, you are missing a huge opportunity because somebody else out there, the buyer is gonna figure out how to tell it to you in their way, and now you've lost a great deal of your power.

Right. So the entrepreneur, the, the power of the seller, I think is in the ability for them to tell the story in a way that literally nobody else on earth could do. Nobody, because they're the ones that know the business. So we want them to start thinking about that pretty early. Right. In the process. Yeah.

Fashioning the stories. How would you tell this story in a way that no one could resist it? That, that I think, kind of pulls the owner out of the day-to-day in a way, right? Mm-hmm. It's like, yeah, we're gonna get into these tactical conversations about margin realization and all that kind of stuff, but you are the person, as the owner in the business, the only one on earth that can tell the story in a very particular way.

Nobody else is gonna be able to do it, and don't let 'em. Because you've given away your power when that happens. 

Wes: Yeah. Yeah. That's, um, that's really a great tip, I think, um, love that, thinking about looking at the future and, and sort of taking control of the narrative and the destiny. Absolutely. Right, right.

Rather than, I'm gonna work, work, work. All right. I guess I'll go ahead and sell. Yeah. And then you, you've at that point, yeah. It's too late. You, you, you haven't prepared for that, that time and, and you've lost the opportunity to control that narrative. Right? 

Sean: Well, that, that, that goes to something that I've always pushed back a little on over the years, and that is, you know, you hear the statement, my business is worth what someone will pay for it objectively, very objectively.

That's true. But it kind of takes some of the, it, it kind of takes some of the entrepreneurial incentive out of the whole conversation because the idea that somebody [01:54:00] else is gonna dictate the value of the business to you. I mean, if there's an upper end to that and I'm already there, then why should I keep trying?

Right? Yeah. It's just, it puts me in a very passive kind of role in this whole thing. I actually think, what I always tell our clients is, yes, somebody's gonna have to decide whether they're gonna pay for the business, and that may be acceptable to you or not. You may get more than you expected. 

Wes: Mm-hmm. 

Sean: But you have a role, you play a role in moving the needle.

You play a role and it's unique. In telling the story that's gonna get them to say, alright, I do believe in a better future because of the story that you've told me about the past and where you think the business can go. So your business is worth what you compel someone else to pay for it. There was a missing word in that sentence, and when I talk to owners about that, they're like, okay, yeah, let's 

Wes: go.

Yeah. 

Game on. You're giving 'em an opportunity to take an active role in that outcome, right? Absolutely. Versus, well, let's see what the market has to say. 

Sean: Right? Yeah. I mean, when 

Wes: the time 

Sean: comes, somebody will figure out what they want to pay me for. Well that's, I, I think that's one reason why owners are not, may not be all that excited about planning for it, because why plan in that situation?

Right? It's just kinda like, well, it'll be handed to us when we get there, so why worry about it? Let's just keep going. 

Wes: That's interesting way to look at it for sure. Um, we talk about, we're talking about transitioning, we're talking about legacy. Um, and if you're sitting in my shoes and I'm leading a sell side mandate, I'm representing a seller and we're running a market process.

Right. We got, yeah. Multiple offers on multiple buyers under NDA and they're interviewing us and we're interviewing them too, right? Yeah. Aside from taking in offers and, you know, looking at the proposed structure and whatever, what kind of questions do you think. That if you're advising a seller, that they should be asking of potential buyers of their business.

Sean: Are you talking about like a strategic 

Wes: buyer of some sort? Yeah. Strategic buyer. You know, private equity. Just how I wanna make sure I've only got one crack at this. Right. It's my only business. I'm gonna sell it. I've got employees that I care about. Maybe I have family members in the business. Yeah. Maybe I don't, but my name's on the building.

It's been my life's work. Uh, I've never done this before. Yeah. I've done this business, I've done a lot of things. I've done a lot of deals and securing clients and, you know, sourcing great vendors and all these things. But now is the time to make sure that I'm selling to the right buyer. And let's face it, everybody can put on a pretty face.

Yeah. Right. So you really got to ask the right questions and read the room and dig a little deeper, I think. Oh, yeah. You know, to really, to, to find the right buyer that's the best fit for your company, the legacy that you wanna leave for your people [01:57:00] that you want to see succeed, that many of which perhaps you've mentored, you've managed, yeah.

Right. You've, you've nurtured in all of those things. And I'm just, is there, is there any slant on that that you have about how to really look at these buyers and ensure that, um, you, you feel like you're finding the right one Yeah. For your business? 

Sean: First of all, I think in order to. Ask the right questions of a buyer, you're gonna have to figure out what matters the most to the seller.

Yeah, sure. Right. So if you understand that, then you've got context for the questions that you're gonna ask a buyer. Mm-hmm. Now, there are relatively straightforward things, like of the businesses that bought in the past, what do you consider to be a success story? Right? Mm-hmm. What excited you about those investments?

Why did you buy those businesses? 

Wes: Mm-hmm. 

Sean: Like, did they have the right financial profile? Did you see something in the owner? Did you see something in the team? What triggered right when there was, when there was an opportunity? I mean, you know how many deals private equity groups look at in a year? Yeah.

It's saying it's, they might look at a thousand deals. Crazy. Too crazy, right? Yeah. So, so as you look through, as you look through all that opportunity, that whole university of opportunity that's come your way, what is it about the deals that you do that makes you decide to do them? Right? Everybody's gonna have a different answer to that question.

'cause it's, I guarantee you when you're talking to a financial buyer, like a private equity group, they're gonna have a significant focus on the finances. But when I talked to them, I did a panel discussion not too long ago with one of the managing directors at BlackRock, you know, and BlackRock buys crazy big.

Companies. Right? $30 billion deals. They don't, they don't, but they have a real good operations team behind these deals that they deploy to help, uh, make sure that their investment is realized. Right. So not every big private equity group has that kind of operational backup, if you will. Mm-hmm. That team that goes in.

But I asked him, we were doing, he was on the panel, I was moderating, and the audience was business owners. And so I'd already told him that the audience would not be $30 billion publicly traded companies. So he knew that we were kind of in that middle market space. And I said, you may just have to, you know, keep that in mind.

But the question was, Hey, Mike was his name. When you, when you receive a confidential investment memorandum, an investment presentation. Mm-hmm. Right? Uh, or you see the teaser and you're like, okay, that's worth looking at. Sign in, da, get the book. You're looking through the book. I'm like, which page do you turn to first?

And I think everybody in the audience expected him to say, we look at the financial performance. 

Wes: Right? Yeah. 

Sean: They've already tested a little of the financial performance before they even, they got something in the [02:00:00] teaser on 

Wes: that. 

Sean: They know a little bit about it. Yeah. Right. What didn't they get in the teaser?

Right. What they didn't get in most cases, is a really good description of the leadership in the company, what their background is, what they've accomplished. He said, the first page I'm turning to is who's in leadership? And that's where my questioning will begin. If we turn to that page in the book and we see leaders that we think are probably not up to the challenge of taking the company where we're gonna need it to go, most likely in order to mm-hmm.

Get back what we need eventually, then the chances are good that we close the book and we don't move any further. So I heard Audible gasps in the audience when he asked, when he answered the question that way. And one of the people came up to me afterwards and he was like, I was really struggling with whether to invest in a leadership team.

Right. But now I understand the importance of it just based on that one answer. I get it because I heard it from the buyers, the investor's mouth. So figuring out what matters the most, asking the questions that kind of surface the why do you buy businesses, what's your motivation for making these investments?

What worked for you in the past? Right. Have you ever seen, have you ever had a situation where the owner who stayed on potentially, or their leadership team just knocked your socks off in ways that you didn't anticipate what was happening in that situation? 'cause you know, anybody that buys a business is just, is, is not gonna go, presumably not gonna go in and, and just bottom out the management team that's been there for a long time.

That doesn't make any sense to do. Yeah, that's a myth. So, so they're gonna keep those people in place at least for a while. What about a management team? What about a leadership team has clicked in past investments? What kind of communications would you expect? Communication style. Mm-hmm. Culture. I think the culture piece is really important to understand.

Yeah. Right. How have you as an investor, strateg or otherwise driven culture within the companies that you have acquired? Right. And then ultimately, I think you're gonna want to know if they still own those companies, right? If it's a private equity group, they may have exited depending on their fun life.

Wes: Yeah. Yeah. 

Sean: But that strategic buyer, what happened? What happened? It's, for me, it's all about, it's almost all about the other investments that they've made and what worked. Yeah, sure. Uh, because that's evidence, right? That's the kind of story that they can draw on. And I honestly think if, you know, I think it's kind of a, a I think it should press them to tell that story.

Wes: Yeah. No, and I think, um, we often ask similar questions like, that might be more technical of the lois that you execute with sellers, of course. What percentage of those do you close? And, [02:03:00]um, you know, could we have Right. The name and phone number of some of the other sellers that you Sure. It's stuff like that.

But I, I like. I like the more open-ended questions like you've suggested. You know, talk to me about culture and how you've preserved the culture and enhance and those kinds of things. 

[02:03:13] Mentorship and Personal Insights

Wes: And, um, as we sort of wind down, Sean Yeah. Um, our questions, I want to get maybe a little bit more personal about you Yeah.

And your work experience in your life. And one of the things that we talk a lot about on like a champion is mentorship mm-hmm. And how mentors have helped shape the leaders of today. And, and, and how we mentor those, you know, younger than us and sort of up and coming and, uh, who have been your greatest mentors in your career.

And, um, yeah. And he may be the most profound piece of advice or guidance that you've received from him or her or them, or, 

Sean: yeah. You know? Yeah. So two mentors I think that have been important to me. One, I was pretty young. I was probably 29 or so, and I got my kind of, my first big job. I, I wasn't, wasn't as an executive.

Well, it was kind of actually. And my, my boss was a guy named John Ross, who has a voice, probably a good octave, deeper than mine. He was, he was a great boss because he was a guide, he was a facilitator. I think he was a good communicator, but he was also a super patient guy. He was just, he was calm. Mm-hmm.

Right. He was really calm no matter what was happening. He had it under control. But one of the pieces of advice, first of all, he said to me out loud, and I think it's important for your mentors, whe if they're, especially if they're in. Positions of, you know, power and authority. Uh, he said, he said to me, you're a leader.

You're a leader. You should embrace that. Learn how to do it well. Right? Yeah. But remember, leadership is not necessarily all about being out in front. Right. He said, if you're gonna be out in front, you better turn around every once in a while and make sure that the people you're leaving are still there.

Yeah. But it's also about being in the mix. Right. Not being separate, being in the mix, actually being connected to people. So I was pretty perf really, really hard driver at that point. Mm-hmm. And what he taught me is that, first of all, I need, I could, I could, I could be a better leader if I could soften my sharp edges mm-hmm.

And be a better communicator. And that I needed to really pay attention to the human aspects. Right. Which I think has carried into my work today. It made me appreciate that success was not gonna necessarily be defined by the top line or the bottom line. The, my other, uh, a friend and mentor of mine named George, uh, I have a tendency to take on too much at any given time.

And one of the great contributions that he made to me is every time we would talk, his first question would be, have you learned how to say no yet? And that really has improved my life [02:06:00] because without saying no, without knowing what not to do, yeah. You, you just end up living in chaos almost. Yeah. And it helped me focus, it helped me focus on the things that I felt like one I could be passionate about.

And two, it just taught me that, hey, my time is important. Yeah. I want somebody else to have hold my clock. Right? So I'm gonna have to learn how to set some boundaries both within my company, right. And also in my own life. So every time I, I ask myself that all the time. Am I saying no to the right things?

Am I saying yes to the right things? 

Wes: Yeah. Yeah. Hey, let's jump on a zoom. Let's, let's grab a lunch, grab a breakfast, grab a coffee. And, and I used to say yes to all those things. And of course, because I do enjoy conversation and meeting people, of course, I, I realized after probably too many years that I needed to be a little more guarded on, on, on that, because it really, it eats up chunks of days and you don't Yeah.

Realize it. 

Sean: Yeah. I think at a certain point in your life, you just have to stop and say what matters to me. 

Wes: Yeah. 

Sean: About that, about every day, what matters to me in this moment. I mean, there's a sort of present, sort of living in the present aspect to it, but man, he taught me how to, how to say no. Yeah.

Comfortable. It's funny that, yeah. 

Wes: Comfortable. It's funny that, that he kind of brought it up on you did on each occasion and kind of drill it into, right. Yeah. Every time I saw him. You, you've, I mean, you know, time is really the biggest asset you have. Right. And not just personally, but professionally. Yeah.

Right. Especially, you know, you and I doing sort of similar lines of work in that sense. Yeah. And so, um, again. I, I read on your LinkedIn page, um, that your passion and, um, philanthropic passion is, is animal welfare. Yeah. Would love to hear more. I I'm a crazy dog lover myself, so, yeah. Um, would love to hear more about that selfishly.

Sean: Yeah. Yeah. You know, I've, I've just had a connection with animals my whole life, I think. Um, and it, and it, it's really a deep connection, I think. It's not like I grew up on a farm or anything like that. I've just always had pets. And I think my, probably the, the, the work that I do there, the reason that I, that I love that is because one, they're vol.

They live in our world. Yeah. Right? Yeah. And I think we have an obligation to sort of care about that. Um, I hate seeing things be abused or harmed. It, it's not just animals. I don't understand that kind of thinking and behavior, but it's particularly disturbing to me when you are doing it to something that has, that trusts you.

Yeah. Right. And, and their wellbeing depends on you. Their wellbeing depends on you. But there's also, I mean, if you've ever looked into the eyes of a dog, you, you get, I mean, for people to say that, you know, dogs, I, my interests are in many different animals, but the dogs don't have a soul or they don't feel pain or any of that kind of stuff.

It just doesn't make any sense to me. So the fact that [02:09:00] they're vulnerable in our world, the world that we've created, the fact that, you know, we've kind of, you know, they depend on us for their wellbeing. I just sort of take that to a whole nother level. It's like a community project for me. 

Wes: Yeah. Yeah. 

Sean: I do feel really strongly about, about spaying and neutering.

Yeah. Right. Because, because they're just too many. Right. Can't take care of all of them. So 

Wes: Sean, Bob Barker's gone. So we need you to carry the torch. That's, that's his legacy. 

Sean: That's true. No, that's absolutely true. And he was right about it. But I'm also a huge fan of owls. Something about birds of prey and owls.

I'm a really committed to elephants. So these are, I mean, I, I just think somehow this, our history, the, the ancient history of the world, right, uh, is, is, is contained in these beings. And I think if you listen, if you observe them and listen to them and what, how they're living and what they're trying to tell you, how they're trying to communicate, you learn things that you can't learn from other humans.

Wes: Hmm. 

Sean: And I, so there's just kind of a dimensional aspect to that, I suppose. I don't wanna get like cosmic about it or anything. But at the end of the day, if I can make their life better, my life is really rewarding. So maybe it's selfish, but I find something there that really matters to me. There's 

Wes: a just a crazy unconditional love that comes with dogs.

That's just, where else do we find that hard to like fathom for me, you know? Yeah. It's at another level. I agree. And, um, and if, if you were to ask my wife, she would say more dogs is better. So we're still trying to work on the numbers, but, uh, two apparently is not enough. 

Sean: My dream, as a matter of fact, is to buy a whole lot of land Yeah.

And to, uh, rescue disabled dogs and just have about 300 of them running around at any given time. That would be something to come home to.

Wes: Yeah. Well, I, I've seen a few similar types of things on social media and I am definitely a little bit jealous of that. I might need some help around there, but Yeah. 

Sean: I love that idea.

Wes: But, um, Sean, one thing or two things, we always ask a book or books that you've read recently over the years that have had an impact on your life Yeah. Personally or professionally. And then the last one we gotta do is your billboard. If you got a billboard that can say 

Sean: Yeah. 

Wes: Anything, what would it say?

Sean: Yeah. All billboards on the planet. Huh? If they said the same thing at the same time, I can handle that one, uh, very quickly. I mean, if I, if I had, if I could put something on every billboard on earth for an hour, it would be peace. Yeah. That's what it would say. In terms of books. I, I actually currently am reading a whole lot about artificial intelligence.

Yeah. And so, you know, one book that I'm pretty deep into is called the Ag Agentic ai. And that sounds super nerdy, but it's a really good book because it takes. All this stuff that people like me who are not, you know, technic for the, for the laymen sort of necessarily. Right. It puts it in [02:12:00] business context.

Like if you use it this way in business, here's what you, here's what it could do. And, you know, I'm the kind of person I'm not, I, I, I believe there will always be some human aspect to business in the way that we communicate with one another. But I fully embrace the idea that technologies may in fact change the nature of work, and they obviously, they're gonna already making us work differently than we were.

Yeah. But I actually think that ai, as creepy as it can be, right, it can be pretty creepy. Yeah. Uh, is one of the most important developments and also one of the scariest, but it's here. So I want to know, my, my version of control in the world is to know as much about things that kind of scare me as I possibly can.

Yeah. So, agent ai, um, it has been a book that's been really rewarding to engage in for me because it's challenged me to understand things that I just didn't even know were going on in the world. Wow. So I'll be sure 

Wes: to check it out. Um, Sean Hutchinson, ready for next Denver, Colorado. How do people find you, uh, value acceleration, exit planning?

How do they find you? 

Sean: Probably the best way would be to email me, it's sean@readyfornext.com because you know, but, uh, you know, ready for next USA has a website ready for next.com can learn a lot. We got a lot of great resources there. But if people wanna learn more about what we do, it's usually, especially if they're owners or you know, professionals, it's best to talk because it's not, this is not really something you can see from this interview.

It's not something that really comes, uh, in one sentence. The elevator pitch for value acceleration, in my view, doesn't exist. Yeah. It just doesn't. So, you know, I quit trying to put it in a two minute presentation a while ago. Everybody has different needs. We need to talk about it. 

Wes: Yeah, that's, that's great.

Um, this was one of my favorite conversations so far. So Sean, thanks for coming on. My pleasure. It's a pleasure having you. Thanks for 

Sean: having 

Wes: me. 

Sean: Thanks Wes.


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Wes Shelton

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