24 May CEO and Leadership Transitions When Selling your IT services firm
As an owner and CEO of an IT services company, you’ve got a lot of weight on your shoulders, and it’s something that you’re had likely invested your entire life and savings in, and it’s a big decision to see what could be next in the future. We’re talking about if you’re thinking about potentially exiting your firm or selling the company, what things you should start thinking about when it comes to the team members and culture and employees and, all the things that matter to help ensure legacy.
As a business owner considering an exit:
- Make sure you can delegate the responsibilities to people running your company.
- Bring the right people into your team and consider compensating them for what the exit looks like to make sure they are bought into the sell
- At home: financially, friends & family, and important to replace a large chunk of your life that you will miss post-exit
- Who will be your sounding board? Advisor? Other CEO friends?
Mike Harvath 00:04
Hello and welcome to this week’s Shoot the Moon podcast. broadcasting live in direct from revenue rocket world headquarters in Bloomington Minnesota. Revenue rocket is the world’s premier growth strategy and m&a advisor to tech enabled services companies. With me and my partners, Ryan Barnett and Matt Lockhart. Welcome, gentlemen.
Matt Lockhart 00:27
Great to be here, Mike excited about are excited about our topic. And you know, I missed, I missed a podcast. And so I’m fired up to get back on the get back on the proverbial horse. What’s going on Ryan?
Ryan Barnett 00:44
Well, we missed you as well, Matt. But if you want to listen and learn about Goodwill, and how it’s treated in a sale, please feel free to to listen to it. This week, I think we’re gonna have something a little more exciting than accounting policies and that love to talk about, as an owner and CEO of an IT services company, you’ve got a lot of weight on your shoulders, and it’s something that you’re had likely invested your entire life in, and perhaps your savings in and it’s, it’s a big decision to see what could be next in the future. And we want to talk a bit about if you’re thinking, let’s say, a year out from potentially exiting your firm or selling the company, what things you should start thinking about when it comes to the team members and culture and employees and, and all the things that matter to help ensure your, your legacy. So with that I get Thanks, Mike, Matt, both for being on here. And we’ve got lots of experiences in working with people all over the spectrum. So let’s just start out. Mike, let’s Why don’t you get this topic going? Maybe talk a little bit about the concept of selling in and selling out as a start. And I think that can go on?
Mike Harvath 02:09
Yeah, for sure. I mean, I think, you know, there’s a couple ways if you’re going to begin to transition sort of out of the business over the long haul, you know, in the beginning, you sort of have to decide is this is this about, you know, leaving the business in fairly short order, and I would define fairly short order within one year of the transaction. Or is it about leaving, you know, farther out, maybe two to three years or five years out, or maybe never, but in the case of transitioning the business, I think it’s assumed, at least in the case of this podcast, he will be transitioning out. We use, you know, you’ve heard this in our other podcasts that term selling and selling out. Selling, it means you’re gonna be there for a while, two to three years or more. selling out means you’re trying to transition right away. And I think the preparations for those things are different. If you’re selling in, you have to be prepared to sort of relinquish some controls in the business. In the sort of play a different role. A lot of times our clients that are selling in, oftentimes, you know, revert to maybe just a sales role. Or wanna be more of a technical lead role. Because that’s where their core skills are. And that’s a way for them to, you know, maybe work less and help to still contribute meaningfully to the business under the new leadership and ownership. Someone who’s selling out really needs to focus on working their way out of a job before they bring their firm to market. And what I mean by that is that they’ve moved their role in the business to be much more of oversight in an advisory role. And much less of working in the business. I used to also use attorneys working on the business or working in the business, more of a working on the business, which is guiding strategy providing oversight, management oversight and direction you know, helping with direction versus working in the business and is very specific roles. Those need to be taken over by someone else to build the business to a place where you can sell out or where you can move on. That’s why we often use a phrase you know you’re kind of working your way out of a job you’re working your way into work on the business versus in the business. So hopefully that sets the stage a little here right
Ryan Barnett 04:44
No, absolutely. I think I think you’re that’s a great topic and Matt you want to expand a bit on this on it’s important to get the first to define what you want to do and and understand are you looking to Who, to do less work to do more. So I think that’s kind of the first thing, but that working yourself on job support, and in that you have to have the team in place that’s able to, to pull off what you do. But that’s perhaps easier said than done. Now, what are some of the things that a CEO has got to think about transitioning?
Matt Lockhart 05:27
Yeah, so I think maybe, let’s frame it and say we’re talking in the context of selling out for a CEO is looking to end the chapter. And, you know, many of the firm’s that, that we work with our founder led businesses, so let’s, you know, keep that in mind that the CEO is the founder of the business. And, and this has been, in many cases, his life’s, his or her life’s work. And, and so, you know, if they want to make sure that they’re maximizing the return on their investment of their time, and their money, and, and so on, and so forth, they also want to make sure that in many cases, that they’re, they’re leaving the business that they founded, or they’ve led in, in great hands in great shape. They, we hear all the time, I really want to make sure that my team is taken care of. And then and, and also that my customers are taken care of. Right. And so all of these considerations need to be sort of front and center in in thinking about the preparation. to, to, to sell your business and, and so what is the CEO, need to think about? Well envision that transition, and, and that new chapter where you are not making all of the decisions. And, and so I think that one of the first things to do is, is sort of practice that and have having that team in place internally, that next level of leadership team in place internally, and who are making the decisions who are operating the business, who are largely the interface to customers, who, who are, you know, really working to drive the culture internally forward. So I think that that’s really one of the very first things that that owners need to do is, is truly make sure that they, they’re starting and practicing working themselves out of a job. Right. And, you know, we see that done, you know, really well and really effectively, and, and, you know, where our clients have been doing that over yours. Right? And, and quite honestly, that’s just good business practice anyways, for a CEO to do. And, and then we’ve seen other situations where they happened. And buyers really noticed that and they and they take that into account. And they they say, Well, we’re we really love the business, but the CEOs got to come along for a period of time. Because without the CEO, the business is at risk.
Ryan Barnett 08:55
I think one of the interesting things you brought up to him, Matt, is that that sales and that customer relationship, is he we have the CEOs that are very in tune with our customer base. And oftentimes that’s why the company has been successful, has been the customer in CEO interact and and I think in many of the the successful sales that we’ve had, that the CEO is still there, but they’re the guy that’s in the in the back of the room. And Justin, is this just to be looked at and everyone else is running the meeting. And there’s very little there that they’re contributing since they’ve successfully transition the sales portion over to other team members and they ensure that entrusted their project managers can deliver and continuing to resell. I think one of the challenges we’ve seen in that same scenario is companies that are especially if they’re a buyers in the P front, they oftentimes look for contract terms, to be the replacement to that CEO. And so if you’re thinking about perhaps a year or two out, you may want to look at some of the ways in which you contract with your customers that can be more resilient to that personal change that comes with it. I think all buyers are concerned that customer relationships are so in tune with the owners, and that you have to do a spectacular job of ensuring that your customers are indebted to the to the business and not and not to you. Mike I’ll transition to things over here. When you’re thinking about a process, and you’re looking at selling the company in maybe a year or two, who should who should know, in this, so if you’re trying to transition it and get it to the right for people? Do you let someone fully know that, hey, I’m trying to get out of this business in a year or two? Or do step opt in leadership and and transition period, then? And who should know? And when?
Mike Harvath 11:22
Well, that’s a great question. I think it’s a reasonable approach to have a continuity plan in your business, right? So, you know, you’re gonna get hit by a bus, let’s say, you need to be talking about, you know, who are the partners in the business? Who’s running the place? If you don’t show up on Monday, right? Because you can’t, you know, you’re injured or have a health issue or whatever. I think having a strong continuity plan is always a prudent strategy, because, you know, stuff happens to people. Right. And I think, you know, we need to be somewhat pragmatic about our own. You know, I don’t want to be a fatalist here. But, you know, our own frailty and, and, you know, the time spent here on this planet, I mean, we’re none of us are going to live forever. So, you know, you want to be able to be thinking about that, I think, pursuant to a continuity plan, assuming a sort of unplanned disruption of the leadership profile of the owners, you, you, you probably want to, you know, begin to have some conversations with the leadership that would stay that’s running the business as to, you know, what’s your long term intentions? Probably are, right? Is there going to be a situation where you intend to, you know, stick it out for five years, or seven years or 10 years? And just do what you do until you can’t anymore? Or is it going to be a we’re gonna evaluate options in two years, I mean, just some broad brush strokes, as a relates to your leadership team, are probably an important thing, because you don’t want to, you don’t want to be surprising people who may be counted on to be going with a transaction. Now, I think it’s also important to consider that the people that are going to enable you to, to do this need to be taken care of in the business. Right. And, and, you know, this is a personal decision, I think, for every business owner, but, you know, regardless of whether you have these are partners with equity or partners with that equity participation, most owners that we deal with provide some of that purchase price or sales equity to their partners, either consistent with their profit sharing if they have a profit sharing plan, which is a great framework to do so. or through other some other vehicles. So I think, you know, some of this is continuity planning pursuant to, you know, an inevitable or questions inevitable but, you know, an unplanned transitional leadership. Some of it has to do with just managing expectations, hey, if we were ever to get an offer, we can’t refuse around here, we would certainly be sharing those proceeds with the people that made it happen, which are your team members, and particularly those that are, you know, running and leading the business. I think it’s it’s a I don’t want to say a moral obligation to do so. But I feel strongly that it is the right thing to do. Right. And I think, you know, most owners that we’ve worked with, certainly think about it the same way. I never think it’s a good idea to spring on a leader who is expected to or may have more more gas in the tank or more, may be here longer to, you know, be in a business longer to spray on them, hey, we’re gonna sell next week, and I hope you stick around, you know, because it’s moving their cheese in a big way. At the same time, I think I want to be really clear, the fewer people that can know about a transition plan like this, the better because I think most people are at your business working for you, because they want to be working with you, they it’s a good relationship, right? It’s a, it’s a symbiotic relationship, they’re there. They’re there, because you’re able to recruit them, and you guys have a good time working together hope that’s the case and certainly you enjoy that. More than that. So otherwise, they wouldn’t be there. And because of that, I think you have to consider in your role as an obligation to be, you know, having this conversation on an emotional basis, but at the same time being sensitive to sort of what those employee those key employees will be going through, I think beyond leadership, it’s probably appropriate to, you know, not fully sure what the plan is, until you’re much closer to making the decision. Because I think if people think that you’re selling out, and you’re gonna leave them behind, people sometimes run to a conclusion that if it’s gonna get changed anyway, I might as well just leave. So I think it’s a very limited set of people that understand and are part of a continuity plan that that have this understanding of, sort of when the next milestone will be for which will evaluate equity transfer, and what their role will be in that. And frankly, what their renumeration will be accordingly, I think having clarity around those items is super important. One, what you know, one point, and this kind of goes back to, if you’re selling in, however, and not saying that you’re going to tell the entire organization, but if you see, and are working towards an opportunity for that proverbial second bite at the apple, because you see the opportunity to grow with a partner, you know, in that case, you know, maybe you’re a little bit more planful, with your executive leadership team, because you really want to have, you know, have them feel as though they’re part of the opportunity moving forward, in, in growing with a new partner. And so, you know, as you were talking, Mike, I think I agree with you 1,000%, on on everything that you’ve said, in that context of if you’re going to be transitioning out, and kind of how to manage that and think about that and ensure that you’re, you’re driving that, that good business practice of, of, of, you know, succession and continuation planning, even kind of maybe even more important to think about that if you’re going to be selling in. And I would say even if you’re focused on having the organization sell in and do an equity role, that’s much more of an investment in the future, and oftentimes, a second tier leadership or your senior leadership outside of the ownership, will be receiving material equity grants pursuant to that deal, in order to keep them engaged on moving forward in the growth through the second bite of the apple. So, you know, we certainly have clients that we’ve brought to market that will, you know, do a deal with a private equity firm, for example. And, you know, maybe there’s a 30% equity role in the future and then ownership, that leader in that business, allocates that to the senior team, so that they can participate in that equity, it’s really what would be considered their payment, if you will, pursue and as a reward for their work there. It’s all a bit tricky, because, you know, certainly there’s a significant delayed realization on that equity, but on one hand, but on the other hand, it is certainly if the plan is realized that it will be worth a ton more in the future with the appropriate financing partner growth partner pursuant to that. So there’s some you know, I think all these aspects that I bring up, are somewhat nuanced by Your own situation. And that’s why, you know, having a competent m&a adviser on your side to help you sort of vet this and think about it longer term, longer tail, you know, and think about exiting in two years or three years or five years. What do I need to be thinking about? The beginning of a relationship will certainly benefit you as you’re contemplating your long term exit.
Ryan Barnett 20:27
I’d love to look to transition a tiny bit here, but yeah, I heard a lot about what happens at work and talk, think about transitioning the, your sales and carry, I would say that there’s some obvious things on ensuring that the numbers are in order, and you’re, you’ve got you’re probably already trusting a finance person with a lot of finance, but what about a home? And what about kind of future planning, perhaps with your family and or even with what you’re going to do? If you’ve been, especially in the the exiting scenario, are those things you should start thinking about when it comes to your friends and family and your hobbies? Even love to hear when you guys have seen?
Mike Harvath 21:16
Well, I’ll just, I’ll go ahead, man, shall we arm wrestle Mike? You know, I often talk to sellers, especially, you know, these, you know, founder led businesses, and when we say founder led businesses, some of the some of these businesses are big businesses, right. And they’ve been working at it, and they’ve grown a substantial, you know, organization, and, and, you know, hundreds, if not 1000s of people. And so, you know, they’re they, they’ve been investing of themselves personally, for, you know, a decade or even long 20 years, it could be right. So, you know, one of the first things that that I’ve talked to, and we talked to sellers about is being emotionally ready for this transition for this new chapter. If of the first step is is, are you emotionally ready to, to sort of, you know, see the end of this chapter. And, and be doing, you know, something different, your life that’s going to be different? And, and do you have other interests then and things that you want to start to explore, that could be going and doing a new venture in a in a different, you know, market, it could be taking a step back professionally, still working, maybe, but taking a step back professionally, it could be retiring, it could be traveling for a period of time with your family, and then and then deciding, you know, really kind of what to do moving forward. But but it is it is a new chapter, and, and being emotionally ready, is kind of part of that. What you brought up, Ryan, part of being emotionally ready is is what does it mean, at home? What does it mean, away from the office? And and I think that that’s a really good point, Ryan, that, that it is, it’s a critical factor for a CEO. And, and we again, you know, talk about it as one of the first steps in being prepared and getting ready. I’d echo Matt, that comment, I think, you know, call it emotional readiness, or call it just being in the right place, sort of being of sound mind and body about what’s next in your life. It’s different for everyone, right? Some people go out and, you know, start a new business, right? They say, hey, this has been a really good run. And, you know, I’m now gonna monetize it. I use the example a lot and I have in the past a Taekwondo studio. And the reason I do that is because that’s a real example of a client we have on the east coast to build a great business and we help sell and he was very into Taekwondo, so he went open three taekwondo studios and to this day that very successful with them and continues to expand that out east and certainly has done a great job with that. For some, it’s, you know, hey, I really want to you know, buy a fishing boat and spend time fishing or be spending more time playing golf or, you know, kind of be retired or give back. Right and we know many that have done material philanthropic donations and travel the world in volunteering in Bangladesh and other places. And certainly, it’s a very, it’s a very personal thing. But it’s one that you need to get come to grips with you and your family about what that’s going to be, and what it’s going to mean long term, some of southern foundations, and they focus their time on their foundation, with proceeds from the sale. Some have, you know, done a variety of things, I mean, I can think of probably 50 Different things that people have exited businesses, where we’ve helped exit businesses have done, some of which I’ve been very surprised as to what they are some of them open restaurants, some of you know, continued and different business pursuits, I’ve always dreamed of doing. Some have spent, you know, more time with their family, because certainly being a entrepreneur or through the early phases, and start up and, you know, depending on their role and working in the businesses can be, in many ways, very consuming, in some ways, all consuming. And they wanted to, you know, that’s put too fine a point on it, get to know their family, again, with the time back that they have, after kind of selling out. So, you know, I just echo math comments about you really have to understand what is next very clearly. And be committed to that transition. In order, I think for the deal to be successful, long term.
Ryan Barnett 26:41
Yeah, and I think that’s, that’s great advice. Great advice. First, to summarize what I heard here today, On the work front, make sure that you’re working yourself out of a job, and you’re able to successfully delegate the responsibilities to the people that were run in your company, that includes customer, customer relationships that may have perhaps contracts associated with them or, or other relationships in which the those relationships are transitioned to someone else. I heard bring your the right people in on your team and and consider options or compensate them for what that exit may look like. In to help ensure that they’re sold and when a company was to move forward. And then at home, I heard I think about what you want to do about that could be a financially, it could be motivation wise, it could be with your friends and family. And it’s important to to have something to replace a large chunk of your life that you’re the missing metal turned off for a few for any closing thoughts and got over to Mike from there.
Mike Harvath 27:55
Sure. Yeah. You know, one thing that I think is also important and, and part of the, you know, for a CEO to get ready, is, is starting to think about who they’re going to work with, quite honestly, and, and, and a good first step in that and it’s a Who are you going to work with as your professional advisors here, m&a advisor, your your attorney, your accountant, oftentimes, an organization’s you know, corporate attorney is is wonderful as an attorney as you’re operating the business but but may not be the best, you know, transactional attorney, for example, starting to develop a relationship with with an m&a advisor early and building that bridge and building that bridge of trust is super important. Even beyond those professional relationships is, you know, who within the network are going to be your sounding boards, other CEOs who’ve been through the process before, ya know, and, and so, sort of thinking about that. So I think that that that’s important, it doesn’t necessarily come naturally, all the time. So that’s kind of why I pointed out but hey, you know, we, we, this is what we do every day and we really enjoy it. So we we love having these conversations with with CEOs. So great topic today, Ryan. Appreciate it. Mike, over to you. Thanks, Matt, Ryan. Yeah, I enjoyed it very much. So that will tie a ribbon on it for this week in the spring of 2023 at revenue rocket. I think we actually have leaves on the trees now. After one of the longest record out winters on record here, but we’re happy to be turning the corner into summer. We wish everybody a great week and a great day. We look forward to having you tune in next week to shoot the moon podcast. Take care and make it a great day and week so long.