- The difference between an owner-run company and a management-run company.
- How resources, priorities, and processes work together to make your business more efficient.
- Why culture and core values are integral to forming a management-run company.
The vast majority of the businesses that Acquira works with are owner-run when we first encounter them.
That means a single person is doing multiple jobs, wearing multiple hats, and it quite frankly isn’t very efficient. One of our main focuses in the first year is to turn that owner-run company into a management-run company.
|Owner-Run Company: A business in which one individual handles most, if not all, facets of running the business.|
|Management-Run Company: A business in which the operations of the company are handled by a team of people with well-defined roles, who set goals and regularly meet those goals.|
Acquira’s Ty Trumbull sat down to discuss how to handle that transition with Acquira CEO Hayden Miyamoto, which you can watch in the video below.
Resources, Priorities & Process
The operations of a company are split into three philosophical categories.
First, there are resources. These can be thought of as things that might show up on a balance sheet. They include cash, technology, IP, equipment, inventory, and staff.
Secondly, you have processes. This is the secret sauce of a company that allows it to turn its resources into something with a greater value. Think of it as the process of turning a precious metal into the circuitry we use in computers.
Finally, you have priorities. Priorities define what a company says “yes” to and what it says “no” to.
These three philosophical categories are what make a company run. As Hayden says, they are “cumulatively exhaustive and mutually exclusive.”
Most owner-run companies don’t typically think in these terms. They are usually preoccupied with resources and typically their priority is simply to satisfy the customer with little thought to growing capability through making better processes or having different priorities.
So the transition toward a management-run company often comes down to refining your processes and priorities. At a management-run company, the leadership team will be the ones asking for more resources and designing the processes of the organization. As a result, they’ll be the ones growing the company’s capabilities.
These capabilities are made up of quarterly goals and quarterly rocks, annual rocks, and running the company to a set of core values. But first, you need to create a roadmap.
Beginning The Transition
Once you’ve acquired a company and announced the deal to the employees, you should begin by identifying where there are any shortcomings and identifying any leaders within the company.
To do this, we recommend creating an employee skills matrix.
“In most acquisitions, the owner doesn't stick around and there isn’t a succession plan,” explains Hayden. “What I would do in that situation is sit down with the owner and I talk about ‘what do you do? What does your day-to-day look like?’ I record all their answers and I download their brain, so to speak. And I'm thinking about it from the perspective of an org chart.”
By identifying the owner’s daily tasks, you can begin to see what responsibilities should be dedicated to different positions of a management team. When they spend an hour of their day handling payroll, that should be delegated to the Financial department. If they’re spending hours a day trying to procure new vehicles, that could be handled by the Operations department.
You will also ask about individual employees: Who handles what? Who is capable enough to handle additional responsibilities? Who is ready for promotion? Then you start crafting a succession plan.
To create an effective succession plan, you should begin by working to alleviate some of the responsibilities from the outbound owner. Let’s say you want to get the owner down to halftime within four months, that means you have to get rid of at least half of their responsibilities. Determine who should take over those specific responsibilities and what that person will need to be successful at the new role.
“Then you just create a roadmap, and you involve the people who are going to take over those roles and those decisions,” explains Hayden.
Organizational Structure & EBITDA Margins
Once you’ve downloaded the outbound owner's brain and created a roadmap, the next step is to start adding depth to the Organizational Chart. A company with 15 employees will have a flat organizational structure. That means it will have a single owner-operator with 15 people reporting directly to them.
From a capital and operational perspective, that can actually be an efficient company but you’re limited by the talents of that single owner-operator and their ability to manage others. It’s this limit that causes most companies like this to never grow beyond a certain size. In order to push past that point, a company needs to grow its organizational structure.
The other end of the spectrum is a company with more than 50 employees. These companies can also be quite efficient because they have a management layer.
“So when you think of a business and you think about how many people they should manage, typically that ratio is about seven to 10 people per manager,” says Hayden. “When you think of a company with 50 people, technically a potentially efficient organizational structure for that would be seven managers, each managing seven people and with one sort of owner at the top.”
In the home services sector, it’s common to find companies with 50 employees with 25 to 30 percent EBITDA margins. It’s also common to find companies with the same margins and 15 employees. Where it becomes problematic, according to Hayden, is the spot in between.
“If you have 25 people working for you that that means you often have people wearing two hats,” he explains. “You'll have someone who's both a service manager and a tech. Or both a sales manager and a salesperson because if they're a full-time sales manager, they won't be managing two or three people. It just isn't efficient for that to happen.”
When you begin building out the organizational structure, look at who is wearing multiple hats and what those specific hats have in common. Is there something psychologically similar about those roles?
“It’s much more typical for a GM to double as a sales manager,” says Hayden. “It’s much more manageable. Or it's much more manageable for someone who's working in marketing to double as a sales manager.”
When you start assigning responsibilities, make sure that the roles that each individual is taking on are similar enough to make use of their strengths and not divide their attention too much.
Growing Capacity Vs Hiring Capacity
When looking at building your management team, you have two options: hire people from outside the organization or promote people from within. When private equity approaches an acquisition, their typical response is to hire someone to oversee the growth.
“Most private equity looks at this scenario as if they'll just hire a new CEO. They think ‘I'll just jump into this business hiring a new CEO who knows how to run this business. Someone who's done it before. Ideally, (a person) who's run or been a key leader in developing the company that I want this company to become in the next five years,” says Hayden. “That's the typical response. And I think it's all wrong.”
When you’re looking at creating a succession plan, you should be optimizing to make as few mistakes as possible.
This approach can often have a disastrous effect on morale and lead to an exodus of talented and skilled employees. Instead, when you’re looking at creating a succession plan, you should be optimizing to make as few mistakes as possible, according to Hayden
“Your first six months needs to be about making everyone at this company feel comfortable and excited about the change that's coming,” says Hayden. “So what I do not want… is for key members of the staff to quit. I've seen this so many times where someone comes in, they hire a GM, and half the company quits. You look at that financially, at the end of year one it’s like a 65 percent hit.”
Imagine you have a service technician who has shown a lot of promise, and during the transition period they take on many of the responsibilities of an interim GM. As the months pass, they begin to feel overwhelmed by some of the duties or simply miss their old job. At that point, they will happily come to you and ask that you hire a new GM or operations director. Then you have buy-in from your workers and you’ve developed a culture of advancement within the company.
Speaking Of Culture…
Culture always exists in any company. However, in owner-run operations, it can often be hidden or isn’t explicitly stated.
But culture is important. In many ways, culture is actually a combination of the process and priorities we mentioned earlier. If you’re going to set goals and regularly meet them, everyone involved needs to understand the company’s mission, vision, and values.
“So what you need to do early on is you need to figure out who the leadership team is, and you need to have a little workshop with them and actually try to identify what is the culture of the company,” Hayden explains. “Most companies that have been around for a while, so this process doesn't take very long.”
Begin the workshop by writing out a list of what makes someone successful working at the company. Then describe the opposite of that. These are the anti-outcomes. They are the traits that someone might have that would make them incredibly unsuccessful. Then look for any commonalities. This will lead everyone to understand what is necessary to be successful at the business.
You should also look to the outbound owner. In most instances of an owner-operated business, their DNA has seeped into the company’s culture. These combined processes – identifying what success means and understanding the previous owner – will help you identify the culture. Then you need to talk to the group and come to a collective agreement on how to explicitly state that culture.
For example, at Acquira, our culture is based around our core values of S.E.R.V.E. They are the non-negotiable values that govern everything we do because we believe true leadership is in the service of your stakeholders.
The culture you define will help you set the company’s priorities, which will help you define its processes, which will determine how you use your resources.
It’s important when building out your leadership team to consider the financial literacy of your employees. As you transition toward a management-run company, there will be a lot of education required, according to Hayden. This will require assembling the leadership team for some well-planned workshops where the information can be properly disseminated.
“So [the workshops] will talk about resources, processes, and priorities. [That is] something that you have to teach,” says Hayden.
Instilling financial literacy in your management team also requires transparency. You should share the company’s financials so they understand what is working and what isn’t. This will help to get buy-in from the team and allow them to set goals that will help the country move forward.
As we’ve said before, any competent business should strive to identify people who exhibit natural leadership qualities. These are the type of people who others follow, and cultivating their natural talent will help you get buy-in for any new strategic endeavors the business might want to undertake.
Basically, it’s a lot easier to get everyone to put in extra work to achieve a goal if there’s someone they already look up to who is passionate about the idea.
This can be done by talking to the outgoing owner, but it’s also something that can be witnessed firsthand, according to Hayden.
“In groups scenarios, it becomes very obvious because humans are funny,” Hayden laughs. ”When you're announcing [the sale of the company], for example, when I introduce myself as one of the new owners. And you'll notice, it's a pretty nerve-wracking moment for a lot of people. And you notice that people kind of shuffle and they all tend to suddenly, magnetically orbit around a few people in the company. And those people in the company are the ones who make them feel physically safe. And those people tend to be the leaders.”
What Does A Management Team Actually Do?
The management team will use the philosophical categories of resources, processes, and priorities to design how their various departments are run. The three crucial components of the management team’s responsibilities are:
- Strategic Planning (ie: how things are run and how often they are reviewed)
There are a number of facets to each of these responsibilities. For instance, each of the managers should have regular one-on-ones with all of their reports. They should also be conducting performance reviews. The leadership team should have a proper communication cadence, where each meeting has a process, outcome, and a purpose.
The transition from an ownership-run company to a management-run company requires downloading the brain of the outgoing owner and creating a skills matrix. You then need to identify leaders from within the organization and work together to define the company’s culture.
This culture will help you set your priorities which will help create the processes that help you best use your resources. By the end of the process, the management team should have buy-in on all of the business’ endeavors and a deep understanding of how the company works and why.
The video above is part of a series of educational resources we’re creating. To be notified when we post new content, subscribe to our YouTube channel.
Have you had any personal experience working for a company that transitioned from owner-run to management-run? We’d love to hear about them in the comments below.
- The operations of a company are split into three philosophical categories: resources, priorities, and processes
- An owner-run company is usually most worried about satisfying the customer, which prevents it from improving its priorities and processes.
- A solid roadmap can help you identify leaders and define company culture.
- Once your company culture is defined, you can get more buy-in from your employees.
Acquira is a business acquisition in a box service. We help entrepreneurs buy businesses and we invest in them and their chosen businesses. We are here to help ensure that each business we work with is posed to make the biggest positive impact possible for its owners, employees, and community.