Losing my CEO-virginity: What are the pitfalls?
Hi all,
A childhood friend of mine set up a business services firm in 2022. He has a completely different skill set from mine, never completed high school, but has worked his way up in traditional industry. In contrast, I have an MSc in Finance, five years in banking, and another three years in CorpDev. The firm has done well, with eight employees today, and is on track to generate approximately 1 MUSD EBIT (25% margin). YoY growth is 150%, and our largest bottleneck is recruiting. The company is currently owned by my friend (majority), a local investor, some employees, and myself.
Seeing that he knows very little about finance and business in general, he has now asked me to step down from my current position on the board of directors (and my day job in CorpDev) and take on an operating role as CEO. I have the utmost respect for people running small businesses, and I know I will get my hands dirty (literally and figuratively). I have also advised people against it on this forum before. However, I cannot help but think that this may be a once-in-a-lifetime opportunity, and as a former banker, the numbers are hard to overlook.
I have been offered a 10% stake in warrants, in addition to the 5% I already own in common stock. I will also be given a salary, which is in line with the one I have today. I will be the only "admin" employee for the foreseeable future, handling everything besides recruiting (which will be done by a technical director and operator). I have already helped him a lot with the finances and have been preparing the annual reports and all board documentation since the company's beginning, meaning that part of the job does not worry me.
One of my fears is that I will not be able to justify my new position in terms of results. I will be the only person performing back-office tasks and the only exclusive cost center not generating revenue. The company is already on track for stellar performance, and although I know there are low-hanging efficiency fruits to be picked, it is not necessarily enough to justify my (in my eyes) hefty warrant package.
Another concern is that I have only managed people in banking and CorpDev before, and although our employees are great, the tone of voice and culture are different from what I am used to in banking. I'm already known as "the suit guy" by some of the employees, and although I don't care about nicknames, I will be an early thirty-year-old CEO managing 50-year-old operators.
I have yet to accept the position, and we've agreed that I will take a few weeks to discuss how we might proceed or if we should look elsewhere to fill the position. I should also add that there is an exit strategy 4-5 years down the line where we plan for a majority sale to a PE, before running another stint with them. Also, I have no cares in the world for prestige and have no concerns about future employment in banking or PE.
What are the pitfalls if I accept this, and how may I overcome them? Are my concerns relevant, and what am I overlooking? How should my friend and I manage our relationship as childhood friends gone Chairman/CEO in the same company?
No insight from me but bumping for visibility and to follow along. Wishing you the best.
As someone whose dad is a partner at a ~50-person accounting firm (~40 accountants and 10 admin), this exact consideration is something my dad's firm is going through right now. What I am about to tell you are observations from one specific, related experience.
(1) "Professionalizing" the back office is a genuine value-add. It may not seem like it is because you are not directly generating revenue, but anything that allows the revenue generators to... generate revenue is a good thing for the business. There may not be much in the way of "low hanging fruit" to improve, but even if you just take revenue generators' administrative tasks off their plate and you do it simply just as well as they do it, that is genuine value-add.
(2) Part of this is just the inevitable. If you are at a business services firm in a leadership position, and you don't generate revenue, it will be harder for you to do your job. This doesn't mean they won't listen to you. It doesn't mean they will actively fight you. It could, and very likely will be, small things around the edges. But when your underlings are generating revenue and you aren't, that can be a friction point.
(3) The operations of a small business is very different than managing people in banking/corp dev. You seem to be broadly aware of this but managing a business, especially a small business, is just not at all the same thing as banking/corp dev. You are lucky that this is a related field (ie - is not a manufacturing business), but there will be a lot of things you will be doing for the very first time.
Thanks for you input. Highly appreciated!
Regarding number 2, I will probably have to shape my role to involve some kind of selling. There is currently not a sales team in place, and most of our business is incoming. I´ve been pondering if it is doable to make some larger framework agreements with our largest current clients in order to solidify the pipeline.
Completely agree. I have quite open conversations regarding what I am knowledgable about and not, and the two largest shareholders are well aware of my strong and weak sides. My friend invited me to do a kind of undercover boss type week with two of the guys, so that I can get out in the field with them to see how things are. For disclosure; it´s not an accounting type of business, but technical consultancy, servicing, and certification. Most employees have apprenticeship degrees or engineering degrees.
+1 for what jl12 said. I can echo his comments as a CFO of several true small businesses going through start-up and rapid growth phases.
Particularly for a service-oriented business and the "professionalizing the back office" perspective, you will want to heavily focus on use of technology or systems to manage workflows and processes. That value of that visibility into service delivery and project management can't be overstated.
Feel free to DM if you want any additional color.
Thanks a lot! I may take you up on that in the future, as I am getting closer and closer to handing in my resignation letter.
Maybe a Buffett style approach could work well. Just get the back office and business side of everything working well and not be a hindrance on the guys that make the revenue. Buffett lets his company’s CEOs run it how they see fit as long as they are hitting targets.
As the poster above mentioned. If you can just run the nuts and bolts of the business and let the others go out and make money, it could be a great partnership. Plus if they scale it up, they’re gonna need someone to do the CEO/COO style work.
Initially if they dynamic of being a young “suit” gives a weird dynamic with the other guys, you can take a servant leader approach and just get all the annoying office work done and let the other guys sell and make money. If you can come in, make their lives easier, and streamline and improve operations, they should like that.
Where can I learn more about investor/operator dynamics and methodology (like what you are suggesting about Buffett and his MO)?
There’s a book called the essays of Buffett or something. Some guy took excepts mainly from his letters to his shareholders and organized it by theme into a cohesive book. Very interesting to read.
Thanks a lot!
Regarding the servant type of role, I reckon that may be the best way forward with some of the older guys regardless. I am just there to make their lives easier, and given the rather quick growth, there´s been a lot of kick-and-run type solutions which are not optimal by any accounts.
My goal is that we will be able to automate a lot of the COO-tasks in the day-to-day. I have only seen COO roles as a banker and in a F1000 company, but I fail to see how much value they add, in particular for a people driven business. I can´t see us needing a full-time role for tasks like that unless we grow the company to 50 mill in revenue. I want to keep overhead costs down low, and I don´t dream of having a large team around me. We´ll outsource all non-vital tasks.
Yeah I’m sure if you’re able to just automate the day to day business junk that’s gotta get done that’ll be a huge lift off them. My parents run a small business with just a few people in “corporate” and there’s always something random that pops up that they need to handle so their employees can just go out and make money. Doesn’t take a large team at all, just need someone competent there and ready to put out fires (as well as just deal with running a business day to day).
I run the entire recruiting process for our main co that does 8 figures of rev myself with 1 overseas employee. I dont think you need a full time director focused on that lol...
You'll be running at $12.59 in EBITDA if you make hires like those.
He´s not full time - sorry if that was not clear in the initial text. He´s in charge of recruiting, the apprenticeship program, supervisor for the apprentices, and technical director. In essence, an operator that is the go-to guy for all the young employees.
Unless I get it forced down my throat by our future owner, we won´t have an HR department, or any other back-office department for that matter.
I´m quite certain I can handle the CFO tasks as well for a period of time, and all accounting is already outsourced. We´re a pretty simple company from an audit perspective as well, and unless we become acquisitive it doesn´t make that much sense to involve more people in that regard. One of my concerns regarding the CFO tasks is insurance, as we operate in a rather heavily regulated industry, which requires us to have several mandatory insurance policies, but I plan to outsource that to an insurance brokerage which will ensure that we are compliant with the standards. I believe we are compliant today, but our current insurance solutions limit our ability to take on certain work in the oil industry.
On a similar consideration with the partnership of my wife. All doctors, don't like admin work/best use of their time is generating/taking care of patients. Not as concrete as yours, but my take:
1) you already have many answers.
2) key value add: allow the generators generate as much and efficient as possible. Help growth/scale through efficient processes and perhaps some approaches (new channels, as you mention)
3) risk management: not sure about this in your buddy's industry,but is often overlooked. Can be a huge pitfall.
4) continuous improvements: processes, perhaps stepping up professionalisation and further education of people
5) exit: as you know well, a well prepared company facilitates the process and improves outcomes.
Just to cite a few...
As you mentioned, there is a level of respect to the operators doing their job. Don't get bugged if they don't take you seriously/make fun at the begging. Is part of the interaction. Key is for you to earn your role, and their respect. It is not because of your title/responsibility, it is about (in my view) a combo of humility, value add, support and no non-sense/roll up sleeves attitude. Picking up the pieces falling right and left and their worries/burden (next to the more focused work as CEO and cfo) will pave the way for them to see your work in their everyday. Don't be a slave or think yourself below them (or just doing venial work), is just an additional role needed, as the company is growing.
Don't worry about the package. If they deem it a good idea and value for money, just prove them right, by overdelivering. Of so, no questions asked and everybody is happy. The other employees and your buddy either don't have these skills you are brining to the table or feel they perform better on other tasks. So they are happy to have you on board to execute with them.
Good luck, exciting gig, let us know how it pans out.
Thanks for that - great input! Agree with all your points, and will make an effort to provide something of value for the employees early on without turning the whole house on its head in my first 100 days. I am in the fortunate position where I have been overseeing the company since its inception, and there are a few things I want to roll out that I know will make it easier for the operators.
Also just thought of this, but in the military, the new first lieutenant in a group is usually fresh out of military school and technically in charge of and out-ranks seasoned veterans with real combat experience. I’m sure you can find books or stories about how to be a good leader when you are younger and have no relevant experience but are pedigreed and technically their boss. It’s a tricky dynamic but can be done well.
Thanks for that - will check it out!
Following
Have you considered taking on some revenue-generating duties in addition to your role as CEO?
Maybe I am being naive and misunderstand the business, but I don't think professionalizing the firm will be such a crazy responsibility that you can't take a couple hours every day getting your hands dirty and cold calling to win new business. At least in the first couple of years, until the company can support its own salesforce.
Yes, I think that will be natural as we progress. Our current strategy focuses on larger clients, and I would exhaust a cold-calling list within a few days. However, building stronger relationships to our largest clients, as well as build relationship with new ones, will be key.
Run a DCF on it brother, if you’ve been with the business since inception you probably know what it’s capable of. At that growth rate and a decent exit multiple you’re probably looking at an exit of around $5mn in a few years. You’ll learn a bunch, build a closer friendship. Vs selling yourself to a bank having to argue for pennies every bonus season. You gotta have an operator mindset with this stuff, and go all in to grow the business
Est vel repellendus officia sed ea sed non. Eveniet temporibus ut dolor ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Dicta et nihil hic et adipisci et. Non voluptates labore harum voluptatum vero. Iure ex nesciunt quis nobis assumenda velit.
Qui voluptatibus aut placeat ullam cupiditate nulla nihil. Reiciendis nam delectus ut sit optio. Enim et illo unde corrupti et consequatur nisi. Sed quisquam enim delectus et iusto reiciendis maiores quam.
Qui expedita sit earum quia molestias. Quidem eum officiis sapiente ullam facere dignissimos illo omnis. Inventore rem voluptas vitae sunt doloremque. Est dolorum temporibus autem. Maxime minima dignissimos ad. Voluptate ab aut facilis ipsa sequi atque magni ad.