Getting Off The Org Chart, Part 2: How to Exit the Day-to-Day and Still Control Your Business

Hey everybody, welcome to the Business Lunch podcast with your hosts, myself, Roland Frasier, and Ryan Deiss. Ryan, how are you today?

I am, uh, I'm, I'm better than you because I don't have like, you know, an exploding eye issue.

Yes, the, the exploding eye issue is not, uh, not the most fun. But what is fun is that this is a continuation of where we started talking last time. So this is like a, a double, uh, double feature lunch, double lunch feature. I don't know what, which, which takes precedence, but, uh, we're rolling back, uh, over kind of the next things to talk about, about what we were talking about last time. Do you want to re-intro that, uh, topic?

Yeah, so we wanted to talk about what does it look like to actually exit the org chart. We talk a lot about, um, exiting and the different types of exits. You talk about and have developed the concept of the 5 evolutions, and so we went through that last time. What are the different evolutions that we take on as, as business owners and, and what that looks like in terms of us, you know, making different exits. Because exit doesn't have to just be a complete full exit, as in I've sold the business. And one of the, I think, most awesomest exits of all is when you're able to exit the org chart. So you're no longer embedded into the day-to-day of the business, but you still own it. You're still generating revenue for cash flow and the whole, the whole thing. Still fully control it. And so this is something I know that you and I, this is what we want in any business that we're involved in. It certainly is what a lot of our clients and portfolio companies want as well. So we figured, hey, let's do an episode on it. Um, a lot to cover. And so we got through half of it in the last episode. So if you're listening to this and you didn't listen last one, you might want to pause this one, go back and listen to last week's episode, because that's when we kind of talked about why you might want to exit um, and really how to approach the process of getting up to finding somebody who can actually run the business for you. And so that's where we are right now. We found somebody who can run the business for us. We've run the full process, got the job description dialed in. We're clear on what we want to be doing so that from an identity, from a mindset, just from a purpose standpoint, we know we're what we're going to be doing. So we've checked all those boxes. Now that we found the person, um, what I'd love to get into, Roland, is what do we pay them, right? Because they're going to want to know this. How do you compensate them? Because I'm guessing it's not just a, you know, simple, we're going to pay you, you know, 100 grand a year, right? It's— I mean, there's a little bit more that goes on to this in terms of how much you pay them and the way that you pay them. And then what's the process of onboarding this person? And then ultimately, what's the the process of actually exiting the org chart? Because I'm guessing it's also not a cool, somebody's here now, bye, hot potato, you got it. So compensation, onboarding, and then the actual exit would be the, uh, three parts in our, in our three-act play here. What do you think?

Sounds great. So let's start with comp. Um, what, what are your thoughts on that when you, uh, when you have somebody that's coming in, what do you think, uh, what do you think that looks like?

I mean, if they're coming in as a CEO, the nice thing is, is there are lots of great resources out there where you can find out what does a chief executive officer make at a company of your size and in your industry. And this is not an area where I would ever try to get super creative. Yeah, it's going to be a combination of salary plus some variable and maybe even some equity. And so that's the piece where it can get tricky.

Yeah. And it's— I have the, you know, the benefit of being right in the soup on 3 different deals right now for doing this. And so, so it's, it's very near and dear to my heart. And we're, you know, we do it, as you know, quite a bit. Um, I guess the, the first thing that I would say is, what is the role that you're actually hiring for? Um, because my philosophy is generally that there will never be anyone who cares as much about your business as you do, and generally no one who would be a better CEO than you would. And if you are truly a CEO— so we're saying, if you're going to, like, should you go and make the leap off the org chart, I guess, is, is really what we're talking about here. And we found somebody who we think could do all the things that you feel like need to be done, or that is going to be a replacement for you in the business. I think the thing is to think about— and you do have to think about this before you start your search, so it's a slight maybe backtrack, you know, to what we talked about before— but be sure that you actually need a CEO. And if you're thinking about that, uh, I think that if what you're really looking for is somebody that's going to handle operations, it's very likely that you just need a good COO. And the COO, the chief operating officer, is going to handle all of the things that are taking up your time, most likely, because most of the people that I know, certainly in businesses under $100 million in revenue, are— most of them are doing jobs that are not CEO jobs. They're doing jobs that are sales, marketing, finance, or ops. So I'm like, when we're talking to portcos, portfolio companies, and having the conversation about how do we professionalize, and they say let's bring in a CEO, my first thing is always to say no one's going to care about the business like you do. Um, if what we're really looking for is somebody to take the operational load off of you, we don't need a CEO. CEOs are more expensive than COOs, and CEOs generally are trying to get some equity in the company, whereas COOs might not be. Um, so I think that's the first conversation that I would have is, is do you truly want to jump off the org chart, or are you just trying to hand off a bunch of stuff that you don't like or don't feel competent to do to an operator? Because if it's the latter, if you're trying to hand it off to an operator, then the answer is probably you could still be the CEO. And, um, quick, quick story on that, dude.

I literally just got off a call with one of our private clients, um, who he, he— because he's talking about like wanting to be able to get, get off the org chart in the next little bit. And I was like, cool, why? Talk to me about that. He's like, just my wife wants to be able to go on more vacations and things like that. I'm like, well, man, you don't have to get off the ore truck to go on vacations. You could just go on vacation, right? Ask me how I know. Like, hey, you can, you can just leave, right? It's your company. Like, you could just take them. And, and we, we talked through the process that, that we run where, you know, how, how we go about actually planning that. But I mean, in the same way that you want to budget with a profit-first mindset, you you should budget your time with a, you know, vacation first, a, a free time first mindset, and, and allow this. Now, this is once the business is more established, not at startup phase and things like that. That's, that's the idea behind exiting the org chart. You're not thinking exit the org chart, you know, day 7 of a, of a startup. But, but yeah, I think it's a great point because all too often we think that we need to completely exit the business to be able to do the things we want to do, when really you might just need to make a couple of key functional hires and rewrite your job description. Yeah.

Now here's what's kind of interesting. So I have two of the deals right now that I'm involved in. We have one with a founder who I had that conversation with, and they were like, yeah, I like it, let's do it. But they were just not able to let go enough to the point where them continuing to be involved in the business was not allowing the business to evolve in the way that it needed to, and also wrecking their personal life. And so that to me is definitely a time when you say, okay, let's, let's get an actual CEO. And so we are now looking for a CEO for that company, and, um, the goal is for an exit off the org chart for the founder into a chair of the board of directors. And so we can talk about, like, and I would like to talk about what is the process of that, because that CEO is freaking out about how am I going to know? I was like, literally said to me, I guess that's not something that would do well if I just went for 2 years and was like, you know, see ya, I'm out. I was like, yeah, probably you— you— no one would probably be happy with that. Um, the other thing was, in that scenario, was that that CEO is really doing the job of at least 3 people. And so the concern was, well, how am I going to find somebody that is the unicorn that I am to do all those things? It's just not possible. And my response is, well, there are other companies like ours where you are not present and they are doing as well or better than we are. So while you're a unicorn in this company, there are other people or other ways of accomplishing the things that you're able to do. And I want to just kind of put it out there that what if we had to hire 3 people or 6 people to do what you do? It's like, well, that's going to be expensive. So let's say that it's expensive. Let's say that they're all $300,000 a year people and we have to hire 6 of them. It's $1.8 million. Let's gross that up and say that's $2 million it's going to cost. But if we hire $2 million worth of people, we're going to expect that they're going to generate at least $10 million in revenue. And if we're operating at a 35% margin, that means the return on our $2 million investment is going to be a net additional benefit of $1.5 million. Wouldn't we make that investment all day long, right? And it's kind of hard to argue against that. You're basically doubling the money. Like, if you can add $3.5 million on a $1.8 million investment or a $2 million investment, you're almost doubling your money. Um, but you're also adding EBITDA and value. And let's say that that company is going to sell at a 10 to 15x. Uh, let's just say it's the low side and it's 10. If we're adding net additional EBITDA of $1.5 million, we're also getting a $15 million bump on the value of the company. And that's assuming that they're only performing at a relatively low level.

So I think that pointing out, Roland, that because this professionalization took place, you're more likely to get closer to the 15 than the 10 multiple.

Amen. Yes. Yeah.

So, and, and you get your life back.

Yeah.

And, and for two other opportunities.

And yeah, yeah. And, and also it has a lot to do with the— what's the structure of the buyout look like? Because the more risk that, the, that they have because the founders, you know, a dependency the more likely there's going to be earnouts and seller financing and roll-in requirements and all kinds of other things that don't get you cash on exit. So that's, you know, that's a scenario. The second scenario is interesting because we, um, we're looking to hire some, uh, people to replace the weaknesses in the company. Some of, you know, a couple of the functions were the CEO founder But basically, the CEO founder had kind of stepped out and was enjoying the quality of life of coming in later in the afternoon and not working every day and taking a lot of money out of the company and had decided it's time to sell. We engaged an investment banker, kind of going through the process of doing that, and the weaknesses that were identified— this founder had some consultants that came in and were working to help do that. to, you know, to, to plug those weaknesses. We realized that we would need some more people and, and started a conversation about maybe bringing those people in. And, um, in that case, um, the negotiation was a fairly large salary, uh, and a, uh, for, for the two key roles that were coming in, one of which was, uh, was kind of CEO-ish. It was actually president. So president's to me the spork that's that is between COO and, uh, and CEO. But, um, but to have somebody come in to do that and then spend a year to 18 months really filling in the weaknesses of the company, and, um, and because the people were coming in from a company that was about 10 times bigger than, than this company, their ideas of compensation were— and what was market was related directly to what they experienced in that larger company, and they weren't wrong, but it was a lot of work to kind of try to help everybody understand that market for a company that is, you know, say doing $100 million versus a company that's doing a billion is significantly different. And, um, and so got about $900 million less to work with. Yeah. And so the, the challenge was that as we kind of got into all of it, um, it was clear that, that the people that were coming in still probably wouldn't fill all of the holes. And so there was, there was some uncertainty about like, will this get us the additional benefit that we're hoping to get, and will it actually exceed the relatively high expense of bringing these people in? And so I suggested another option, which was to run a boxed sprint for exit readiness. So not basically, uh, let's fix the company to maximize the value, but let's just plug the holes as much as we can within a 90 to 120 day period to get to exit ready. Do that on a, uh, on a lower kicker on a, on a base. So let's say we say the company is, uh, X million dollars is what it's worth right now, and our target is to add another $20 million onto it, then we would basically have the bonus kicker based on what's the amount over the baseline that we're able to get as a result of having them in there. And, and that would be— it's, it's somewhat arbitrary and definitely very negotiating, um, you you know, very negotiable, I guess I should say. But, um, but you pick a value that you say, we're pretty sure we can get this for the company right now. Um, so everybody, if everybody agrees on that, then let's do everything we can to get more than that. And there will be some participation in that addition, in addition to whatever, on a percentage basis, uh, in addition to a compensation in dollars. And so we're in the process now of figuring out what's good there. And what happened there was really interesting. And I know, I know this founder listens to the podcast. So I'm— I want to be— I want to be clear on what the, like, the, the process was without giving away too much.

Let's call them out by name and give all the details.

But really, what, what I got was, was, you know, hey, I'm not sure that this longer-term thing is going to get me what I want. And I, you know, and it might impact my quality of life, and I don't want to have to change the good things that I'm, you know, doing, and I don't want to have to, like, you know, get less money out than I've been getting because I'm investing in the company. So that was when I proposed this kind of happy medium between let's go in and spend 18 months fixing up the company and get max, max, max value, and You know, but, but that might require you to come back in, which, you know, which wasn't the goal. So that's something that people can think about as well, is, you know, and you know this, that we do this for people, is, you know, we can come in or other consultants can come in and run a specific plug the leaks, get as much value as we can during a 90 to 120 day period, start the sales process. Contemporaneously with that so that it's running as well. And then within about 6 months, you should have a sale, and you should have a fairly optimized sale, even though it won't be the full value that could be realized. But it will be a lot more certain value that you'll get doing something like that. Then hopefully we'll be able to plug the holes over 18, you know, 12 to 18 months, and hopefully we'll be able to get more, and hopefully the market won't change and the appetite of PE for this type of business won't have changed. And hopefully, hopefully, hopefully, you know, so there's a lot of risk that you're going to get if you make that bet. And hopefully you're making the bet thinking the odds are in your favor, but it isn't guaranteed. Whereas I really do feel like there are specific playbooks that can be run over 90 to 120 days that are guaranteed to result in more money or a better structure for you because you— they're knowable. Like, you know, you know these things that need to be done, and you know that they can be done, and you know the effect of doing them will be X, then that's, that's a, a way lower risk. And also, it doesn't really change— cause you to change the amount of time and effort you're spending in the company. Or even if it did, it would only be for that short period of time. So that's, that's a long way of getting to the next thing that I want to talk about, which is, is this compensation Is there anything about that? You have questions or thoughts?

Yeah, no, I think it's good to—

it—

I think it's good to go through that because there's not just one obvious path to make this thing happen. And I think that a lot of people want to assume that it's this binary thing, um, and it's not. There are some in-betweens. And so I literally—

my message was literally, I think that you're accepting a false binary that, that isn't the reality here. Yeah.

And it's hard because when we're talking about this stuff on a podcast, we want to keep it simple. But we also trust our listeners, frankly, to be more sophisticated than the average chucklehead listening to whatever. I mean, we know that most of our people are smarter than the average bear. And I'm not just saying that to, you know, butter them up. I mean, really, that is the case. And so speaking to some of the nuance, I think, is definitely helpful. Um, but if we're thinking about, okay, I do know for a fact I want off, I want to bring on, um, a CEO, maybe a president type person, but they're definitely going to be running the show. I'm definitely going to be, you know, exiting stage right. That, you know, that's the plan. Yeah, what are we typically paying that person and how should we be thinking about compensation? I know we've got kind of some standard practices that we like to deploy.

Yeah, so it's really good because I haven't looked this up on, um, you know, PayScale or, uh, or any— or salary.com. But what I can tell you is out in the market from the live deals that I'm doing is if they're coming from a 10-figure company into your company, even if your company is a 9-figure company, you're looking in the neighborhood of $600,000, $700,000 a year in cash and some sort of equity kicker to participate in the exit. And where that might be is anybody's guess. I have seen it, you know, I've seen it from nothing, but that's unusual, to a couple of points. I'd say the average is around 5 points for a CEO, and, um, and I've seen it go up, uh, north of 12. So it, it depends.

Now, figure range, say again, that we're bringing somebody in on— let's assume somebody in the, in the business is more in the 8-figure range, $20-30 million company, uh, then, then I think—

and I was going to get there— I think if you're looking in a company that's there, you're going to be in the $300,000 to $500,000 cash range and probably in the 3 to 5%, uh, equity range. Now what's nice about that is you can trade those things off usually. So like if you're very opposed to equity, um, there are— and, and equity is structured in a way that's tax beneficial for them as well, by the way, because if you just gave them equity in this company, they'd pay taxes on it the day they got it. Um, and very often there's a hurdle rate, there's a baseline that you're saying the company is worth now. And so Like, if you're smart, I don't want to say too many things at one time. So, let me, let me just stick with comp first. So, in that company, you'd be looking, like I said, in that maybe $300,000 to $500,000 range, 3% to 5% equity and/or kicker or participation in sale above baseline or something like that. And if it's smaller than that, you probably don't need a CEO. You know, it's, you need a COO. That's kind of compensation. Now, when you get to structuring the compensation, like I said, you can trade off typically cash for equity. Uh, cash is a certainty, equity is not. Um, the other things to think about are, um, what if things don't work out? If things don't work out, and they very often don't— another deal I'm doing right now, we're trying to get out of a deal that has a CEO that was brought in who didn't perform to the expectation of the owners, and now they're like stuck with them. And there's a little bit of what I would consider to be predatory, um, negotiating going on, trying to get this person out so that the original people can bring new people in and do what they want to do with the company. And that's, that's been an ongoing challenge for months.

And just to clarify, getting them out in terms of getting the equity back, because I mean, if they're an employee, they should be able to fire them, right?

Yeah, they, they can fire them, but the deal that was made has compensation that continues indefinitely at a fairly high rate. And because of how the deal was done and the relationship with the shareholders, it wasn't as easy as you might think to get the person out. So it's a unique situation, but unique in that every situation is unique also, right? So, uh, So, but, but what didn't happen there is that going into the deal— and we didn't advise on the going in— um, that going into the deal, there wasn't a process for identifying, is this working? And, um, and so what happened was whatever results were being generated or whatever effort was being given Um, it didn't really matter because there wasn't anything you could do about it, and you're stuck with this person for pretty much ever until the company sells. And, um, so the way around that is to say, look, as we go in, this is an at-will employment, um, and you have this ability to earn some bonuses if certain things happen and we're going to define what the KPIs that we're going to track on a quarterly basis are. And if you are not hitting those KPIs, then don't expect that your employment will continue. And if you're not hitting those KPIs, we can send you on your way without any of the kicker or bonus or equity participation. I would also make the equity participation vest over a period of time, not just performance-based but also time-based. And, you know, like, if, if there's some amount of bonus that's cash and there's some amount of bonus that is equity-based, having a 6-month window before any of it vests, and maybe it's half at 6 months and half at a year, you know, or something like that, you really want some time to go by because working with people It's like dating. Like, it's easy and everything looks great when you're dating, but then when you travel together or live together, then you really get to see how people are in different situations. And so I think you want to give yourself time in your company to see how this person is going to fit with you and your company and your company culture. And if they're not, you need to have off-ramps. And so the off-ramps are typically some sort of temporal, time-based and performance-based vesting. And the performance is based on KPIs that you agree on. They can be adjusted from quarter to quarter. They can change. Ideally, they're leading indicators, not lagging. So they're leading and they tell you that whether you're on the right track to be able to achieve the things that are your targets. And, um, and, and that's a really good way to do it. And then if for some reason you let the person go, like if you, if you're able to negotiate at-will employment, meaning you can let them go anytime Um, then typically if a transaction happens within some period of time, rather than having them vested in their equity forever, it's only for a tail period. And so typically, like, for 12 months, 6 to 12 months after they're voluntarily leaving the company, or, uh, you know, or being terminated would be one way to do it. You might say if you voluntarily leave, you get nothing, so that you're disincentivized to leave. But if you are terminated, then, um, you know, with, with or without cause by us, then you're going to have the ability to participate in a transaction for whatever has vested at the time of termination for a period of 6 to 12 months. And you don't say for a period of 6 to 12 months, you decide. But, um, that's a really good way and a very commonly accepted way to structure deals like that. Does that make sense?

Yeah.

Yeah.

What about, um, You know, I, I know frequently one of our favorite ways to do these kinds of deals, and it avoids a lot of the vesting issues and things, is instead of doing actual equity, to do more of a profits-only interest, uh, deal or phantom equity. Can you speak to those and, um, how, how we would use them and how— I guess also what it is and a typical deal structure and maybe some of the benefits of it?

Yeah. And, and as I do, I would say that the, the tail and other things that I talked about would apply to all of these. So whether it's equity or what we call, you know, synthetic equity— synthetic equity is kind of made up, um, uh, synthetic equity would be phantom stock, which is just a contractual right to participate in profits and sale of a company. If it's a corporation. Uh, profits-only interest is basically the same thing. It's a contractual form of synthetic equity that allows you to participate in the profits and the sale of the company. There's typically something called a hurdle that would apply to either of them. It's required from a tax purpose standpoint in the profits-only interest. I'm not sure what the current status is in phantom equity. I I don't believe it's required, but it is wise to have it. So what we're generally saying in those types of—

to be clear, that hurdle is we're going to establish a benchmark for—

that's what I was going to say. Yeah, I was headed there.

Oh, sorry.

Yeah, yeah. So the, so the hurdle is, is we're going to say that the current value as of today is X, and that just needs to be within the range of fair value. If you want to be super certain, you could always get an appraisal. But, um, the So you're basically saying you're going to get— let's say it's 10%, you're going to get 10% of the profits of the company until it sells. And in addition to that, you're going to get 10% of the net proceeds on sale. Um, and the 10% of proceeds on sale is going to be 10% of the proceeds above the value at the— as of the date that we enter into this agreement. So if we enter into the agreement and we decide that the fair market value of the company is $10 million, and when it sells, it sells for double that, for $20 million, then you'd subtract the hurdle out to apply the percentage to. So you'd say $20 million sales price minus $10 million hurdle valuation at the time we did the deal leaves a $10 million increase in value over the time that the profits-only interest or the phantom equity was entered into. Uh, that percentage that you got was 10%, so 10% of $10 million is $1 million. So the compensation on the profits interest for the exit or the phantom equity would be a million bucks. And, um, and then there are things that you can do to, um, uh, you know, to adjust that in up or down. But that's, that's the, like, the general gist of it. And, um, and a lot of times that can be simpler because there's no voting rights and things like that. It's not actual equity, so that can make it easier for the owner to do things they're already doing. It might not interfere with benefits or 401(k)s or other plans that are in place. It might make them more comfortable that there's not going to be somebody that's got voting rights that comes in. They're not going to have to create multiple classes of equity, some that are voting or some that are not. It just saves— I think it makes things really clean and easy, and, um, and, and it is our preferred way to do deals.

What are some of the— I mean, so obviously the upside benefits are like it's simpler. And, you know, you talk about there being a, being a tail, like, so if the person is let go or they leave, you can build in like that they would still be able to participate in compensation, but you wouldn't necessarily have to. I mean, it could certainly—

No, and we don't because we don't, we don't want to go into a deal that only has that. The tail is usually for execs that you're bringing in for a specific purpose, like they're coming in to help get it exit ready and the plan is to have a transaction. Um, so like if, if that's, if that's what's happening, that's different than we're coming in, we're adding a whole bunch of value, we're building it up, we're going to work in here for, you know, 2, 3, 4, 5 years. And then, you know, I, I have absolutely no interest in going into a deal like that where we don't have our equity, you know, our synthetic equity participation, you know, pretty much forever, right?

Yeah, exactly. But if you're talking about an executive, one of the benefits of this— if going back to the scenario where if you bring in a CEO and you're thinking this thing is going to be amazing, and you give them 5% equity in your company, and this is like actual equity or options or something like that, and, um, and, and there's no vesting or anything like that, if it doesn't work out, yeah, you can fire them, but they still have equity in your company.

Now that's exactly You're stuck.

If you're going with a profits-only interest or a phantom equity, that is a contract that effectively terminates when they terminate.

It can. It just all depends on how it's drafted.

Correct. Yes, that can be terminated, unlike though equity, which is designed to be persistent. And so that's the benefit here. What's maybe the downside to the— I mean, obviously a lot of upsides to the company. There's some upsides, you know, lots of upsides to the, um, you know, team member as well. What are some of the downsides?

Yeah, and I also want to clarify because I, I did say that FANOM is usually with corporations, uh, and profits-only interest— I don't think I said— is usually LLCs and partnerships. So that's— it's pretty much the same agreement, uh, for all intents and purposes, um, except you use one in one context and one in the other context depending on the type of entity. Um, in terms of the downside, you don't get voting if you are the person who is on the on the consulting or services rendering side of a phantom equity or a profits-only interest. So you don't have the ability to influence the direction of the company that way. You don't have the ability to participate in the voting for the election of the directors and the officers of the company. You generally will pay ordinary income taxes when your interest is sold. You don't qualify for QSBS, the Qualified Small Business Stock exemptions and things like that. So there are definite downsides there, but honestly, for the deals that we do, it— none of that stuff really matters that much to us. We, you know, we vet the deals pretty carefully, and then we're comfortable that, you know, the direction of those things is going to be something that we're happy with.

What would you say to their CEO? You really, really want them, feel like they're very well qualified, explain to the fact that like, hey, this is how we do it. And we're talking about again, $20-30 million company. The way we do these deals is profits-only interest. It's an LLC, right? So we're gonna do this thing as a profits-only interest. And they're thinking, I don't want to do a profits-only interest. I want to be able to receive actual equity in the, in the business. What say you?

I would say that is, uh, that is something that we can do. It's strongly against your interest because the value of the company is, let's say it's $10 million today, and if you're getting a 10% participation or a 5% participation, you're going to pay taxes on $500,000 to $1 million of ordinary income, and you won't have any money from the company to do that with. So I don't know why you would want to do that. Um, I would recommend you talk with your tax advisors about it because, you know, seems like something wouldn't do— in terms of like, is it doable for us and could we end up in the same place as those other types of agreements? The answer is yes, because we can have call options to buy them out. We could have vesting, still could be a thing. They could get equity that's— that vests over time and performance. Um, they— it could be callable, it could be cancelable in the event certain things happen. So there's, there's a lot of, you know, there's a lot of tools in the toolbox to have the protections that we would want with those other things. You could do different classes of stock so that they didn't have— or, or different classes of equity interests so that theirs was non-voting, so that they didn't have voting rights. So you can, you can definitely slice and dice it up using different rights and different tools to be just as favorable for you as the issuer, uh, you know, company, as it would be, you know, as one of those other things would be. The other thing I might, you know, suggest to them is, look, if you don't want phantom or profits only, let's not do equity, let's do options. And then they can file an 83-B and potentially get long-term cap gains treatment on the upside. They're, you know, they're, they're definitely— it's just to me pretty tax foolish to take it to straight equity.

Then that's the point that I wanted to make, is if somebody is coming to you and saying, but I want the equity now, you may be dealing with someone who's way less sophisticated than they're making themselves out to be.

Yeah, exactly.

They likely haven't actually been in a real CEO role before where they received actual stock and equity compensation, because we hear about this all the time. Oh, this person receives, you know, stock compensation when they join this company. I mean, if it's a startup, then they received options. Yeah, right.

I will say too that like it all depends on what the experience is of the person that's coming in, because there's another deal right now we're in the middle of that's an experienced CEO and they're coming in for one of those Box Sprint kind of things. And, um, and they're like, yeah, no, I'm not expecting any equity, you know, uh, it's that, you know, $400,000-ish range of compensation, you know, during the time that, uh, that they're going to be there helping, which is anticipated to be 3 to 6 months, you know, that like— so it's nice when you have someone like that also that's not like— that you don't start with this— I'm going to say ridiculous— you don't start with this ridiculous ask that is coming from a completely different marketplace trying to be forced into the, you know, into the situation that's at hand that doesn't support it.

Yeah, I don't, I don't have an issue with the person who comes in asking for, you know, a lot of money and just pure cash. Yeah, you know, that could be very appropriate. I don't even have an issue with the person who comes in and they want to have some type of stock and equity participation and they understand that it needs to be either a profits-only interest, phantom, or options. I'm saying beware the person who wants stock and believes they should have equity, but they want it all now.

I agree.

This is somebody who's unsophisticated and this is likely somebody who, if you're— if they're going to be running your company, as a CEO, you kind of need to know some of this stuff if they're going to take it to— like, they need to understand. I mean, yeah, even if you got a CFO, like, they need to have some basic understanding of these kind of things. And so it's one thing if you're not asking for it and you don't know, but if you're asking for it, you still don't know, that'd be a big red flag for me. Yeah. So just wanted to kind of throw that out there. And we've heard it before. We've heard it from people who supposedly were super experienced and had all these, you know, All this background. So be— buyer beware, um, on, on that one. Um, okay, so we've figured out the compensation.

Yep.

Everybody agrees on what's going on. We've got our profits-only interest, got the deal worked out. The person's starting on Tuesday. What the heck should happen? Like, what does that onboarding process look like? I mean, obviously the CEO shouldn't just, you know, smoke bomb and be gone, but they also shouldn't linger there forever. What's the transition?

Yeah, I think we're creeping in from the external to the internal. So moving more from my area of expertise to yours, what I will say is that the, the most successful transitions that I see are not immediate 100% handing over of the reins. They are, what is the plan? And we have a 90-day plan in advance that everybody has agreed to. We've got KPIs that we've agreed to. And then, um, we basically say, what am I replacing? And usually it's more than one major function that's being replaced. And so let's say that there's 5 of them. Then we say, okay, well, let's replace Function 1 first. And how do we identify which of the 5 functions that'll be? The first one's going to be the function that's taking 80% of your time but only contributing 20% of the value. So we're going to 80/20 that, and let's get that off your plate. And it's the thing that you hate the most— talking to the CEO that exists now, the owner, uh, what do you hate the most? What sucks all of your joy out? What is not your area of expertise and genius? And, uh, or at least that's the least of your expertise and the least valuable thing to the company. Let's knock that out first, and, um, let's set a time that that's going to happen within, and then make that transition. If there's 5 things, let's make that a 5-thing transition, and that as you successfully complete one transition, you are more confident that the next will be done faster and better and also competently and also within the time and the way that you think it's gonna, you know, would best happen. And then really beyond that, it's just the process of identifying what those things are, charting it out, making the schedule, and, um, and then having a meeting cadence to, you know, to check the KPIs to be sure things are happening. Um, one thing that you may or may not build into the agreement that you do with somebody would be a cure period. So that they have some period of time if they get behind on the KPIs to work to fix that. If we're going into a deal, we're going to want a cure period, because sometimes things happen and maybe we missed it but it wasn't our fault, or maybe we were wrong about something and we want a chance to fix that thing we were wrong about before just being booted out. So that, you know, that might be something that you've got. But other than that, I think it's really just having a very clear process for how that's going to happen. And I think anything more specific would probably fall more in your, your area.

Yeah, and a lot, and a lot of it, it, it, the— it's always a little different because it's going to depend on the specific situation and circumstance. Ideally, and we talked about this in the last episode, you have managed to hand off the other roles that are not CEO you know, by now, like we've gotten to a point where you've been able to do that. And so this is that last kind of piece that you've handed off because ideally, to the point that you said before, you've tested the idea of do you need a CEO, right? Do you even need it? Like, do we really need a CEO? Or like, do you just need a head of sales and do you just need a CFO? Do you just need an operator? So maybe we've tested some of those. And so if it truly is the case where you're bringing in a singular person to come in and replace you in the role that you're doing, we would target a 90-day process for that. 90 days is arbitrary. Maybe it needs to be a little bit longer. It's hard for it to be much shorter than that, just given the trust very often that needs to be built and the things that need to get figured out along the way. But it's easy— it's easier to describe what not to do than it is to describe exactly what to do. So I'll say what definitely not to do, and then we'll get into the middle ground of what it should look like. What it shouldn't be is, again, they arrive on day one, you hold a big meeting saying, this is the person who's in charge, and then you say, good night everybody, see you later, and then you board a plane and you fly off and you're gone.

I will say two things I want to interject. One is Um, one of the best ways, and, and I— this is how I would say I have seen it work the best too, is that whoever this person is usually comes in for a period of 90 days or so as a consultant prior to coming in as a CEO. That's really, really effective. And, um, the second thing I would say is that in my experience, at particularly over the last year, the deals that this is happening, the executive teams are not fully formed, and they're not fully formed— they've, they've only partially professionalized. And the barrier to that has been the CEO founder. So the CEO that's coming in is generally coming into a partially professionalized, partial CEO suite, a partial C-suite, but they are not coming into a fully formed one where they're the CEO, which is actually a good thing because they have more ownership and more buy-in, uh, and more responsibility and accountability for filling the last remaining professionalization roles. So, um, that's another thing just that, that I've encountered a lot lately.

Yeah, for sure. I mean, the head coach is going to want to hire their, you know, their coordinators. Um, so that— yeah, absolutely. Um, so, and what you said about if they can come in on a consulting capacity for 90 days, you're right. That is, that's a dream. If when the person is formally announced into the role, everybody thinks and the response is, oh, great. They've been doing that anyway. Yeah. That's ideal.

Yeah.

Like, that's what we want. That's way better than who? And so— Who and why?

And why isn't it me? Because I always thought that was going to be me.

Right. Yeah. And so if the person can be there in this kind of consultative capacity, to do that and the reins are handed over to them, that is ideal. If that's not the case, then we want to, in a sense, mimic that type thing. So they can't show up and then you're just gone. We need to bring them in and we need a 90-day process where you're still doing the thing that you're doing. And for the first 30 days, they're pretty much monitoring, right? They're there by your side, watching, asking a lot of questions, meeting a lot of people. Making suggestions, but primarily they're still doing a lot of the communication through you, right? While they're building trust and relationships, then kind of day 31 through 60, they're starting to do more of the things. And ideally by day, you know, 61 through 90, you're really starting to pull back and you're there, but you're not— you know, there's meetings now that you're not attending. They're the ones that are sending out certain emails and communications. And by day 90, it is clear that they have it. Now, can this always be achieved perfectly over a 90-day period? No, but that's the general goal. That's, that's the cadence. If it takes you 6 months, duh, you know, some, some balls might have got dropped along, along the way. It shouldn't take a year. I mean, it really is as simple as that. And here's what I'll tell you. Once this person is there and once it's clear that It's their job. You need to get out. Okay. If you're getting off the org chart, you need to get out of the building. And so if you occupy a physical space, you, at least for a season, should stop going into the office. And that will break your heart because you like going into the office and you like having this like empire, but you need to stop going into the office. Ideally, you give up your office. You need to get out of Slack. Maybe you have an account, but you need to get out of all of the channels that you are in. Now, you may decide that for a period of a couple of months, you're going to have a regular check-in with the new CEO. Maybe you're going to go grab lunch once a week or something like that for a period of time. But eventually, the goal is to get off the org chart, which means you're functioning like a board member. Board members get communicated with. On a quarterly or at most monthly basis. That is the board member community, or if something major comes up, and that's what you should be working towards, certainly by the 6-month mark.

Yeah, that's— I like that a lot.

Goal is, is to be there. Um, and so that, that's how we would look to work that transition. First 90 days, think about it like a consultative handoff period. Day 1 through 30, you're doing it, they're monitoring. Day 31 through 60, they're doing it, you're monitoring. Day 61 through 90, they basically got it. You're still lingering a little bit, but you're out. And then day 91, you are gone like Donkey Kong. Okay, you're outies. And, and you gotta get gone. Like, that's the hardest thing. The biggest mistake you can make day 1 is to leave. The biggest mistake you can make day 90 One is to stay.

I like it.

So, well, I think we took everybody through the why and the how and the bringing the people on and all the things. So not to say that if they want to exit the org chart, you know, just listen to these two podcasts and like, you got it. I mean, I think it's pretty much most of it's there. It's not easy, But I do think that the process is simpler than most people might think that it is. What the reality— the hardest part in my experience is the identity component that we talked about in the last episode.

I agree.

Being okay. And that, that's why the not lingering on day 91, that'll be the hardest part for you.

Yeah, I agree.

And, and not going to those meetings anymore and just saying like, I'm not running this place anymore, so it's not appropriate for me to be here anymore. And doing business with that reality before you ever choose to exit the org chart, that's step 1. And that's why we talked about it, step 1, back in the previous episode. You've got to do business with that reality. And if that doesn't sound great to you, then let's just build a CEO role for you that you do enjoy. Like, let's ask the question, what would need to be true to— for me to fall in love with my business all over again? Because there's a lot of business owners out there who want to exit the org chart because they hate their business, because they're burnt out. And the truth is, they don't hate the business, they hate the job they've accidentally built for themselves inside of their business. And if we can just redesign that by, like you said, figuring out what's the not one role that you're doing that you call CEO, what's the 6 different roles you're doing that actually do have names that if we can put 5 people in 5 of those roles and leave the one that you actually like, that's high leverage, that you're good at, you might just find that you don't need to exit the org chart and that you do, um, like doing what you're doing. And a lot of that, again, it's, um, shameless plug, but it does start with getting that operating system in place. Yep. That's going to be the highest leverage activity that you can perform, is because one of the biggest jobs that you have, whether you realize it or not, is the job of operating system. Like, you are the operating system of your business. And boy, there's one thing that's true about operating— you don't ever get to turn off, ever, ever, ever. You, you don't, you don't get turned off, you don't get to shut down, um, and you do overheat. So anyway, final word.

Yeah, I like it. So hopefully you guys found this valuable and helpful, and, um, it's definitely something that is the logical step for any entrepreneur to take as their business evolves. And I think it'll drastically improve not only the quality of your business but the quality of your life. And if you found it helpful, please share it and let other people know. And if you have questions, comments, or want help with this kind of stuff yourself, feel free to reach out to us on our social media, which is generally forward slash, forward slash, uh, Ryan Deiss or forward slash Roland Frasier. Uh, if you're looking for more specific help with the operating system, scalable.co CEO would be the place to go. And, um, we'll see you next time.

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