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Posted: December 09, 2011

Those 20-year employees

Find 'em and keep 'em

David Tolson

Business is about relationships - whether customers, suppliers or your employees. Employees, as one stakeholder in the business relationship equation, can create a highly valuable business or can doom a business to perennial underperformance.

As business owners, we are all faced with the prospect of having to recruit, hire and retain talent. While any one of these steps can be difficult in and of itself, they are even more challenging when all three are combined. We often hear jokes that most managers (or business owners) are right 50 percent of the time when making hiring decisions. This is particularly troublesome when you are looking to place (or replace) a senior / strategic position within your company.

The 20-year employee is the strategic manager that has longevity, talent, passion and growth potential to ultimately replace the business owner. Of your current employee base, how many employees can you truly describe as such? The sad truth may be not many.

At the 2010 Colorado CEO Forum, Jack Daly discussed the responsibilities of the business owner in the hiring process. In essence, he stated that we should be constantly recruiting and interviewing, whether we have a position available or not. By so doing, we create a pipeline of candidates that we effectively can source at any given time should the need arise. The very act of continuously recruiting affords business owners the chance to evaluate the current talent in the company as well as the talent in the market and the needs of the business.

Recently, we have worked with a fast growing company that is trying to manage their growth (to protect confidentiality, let's say that it is a manufacturing business). One of the key areas of risk we highlighted was the dependence of the business on the owner. He was in charge of virtually all aspects of the business in terms of day-to-day management, and was not particularly well suited or interested in handling the production side of his business. He is someone who is constantly evaluating his business needs and his current team. He meets with many people and keeps resumes and business cards on file.

After recognizing his need to fill a production manager's position, he went to his recruits list and identified a candidate that he wanted. This candidate was an industry veteran who had worked for several very large companies in his space. He had great experience in the world of production and as a result, was well compensated. He was concerned about the dollars the industry veteran was demanding and was considering passing on him. After careful consideration, he was able to structure a package for this executive that provided a bit more security for his business in making such a higher, and solid upside opportunity for the veteran.

Fast-forward 18 months, and witness the difference this hire has made. Both gross profit and net income are up substantially, morale has improved considerably, and the company's production times have been reduced significantly. Combine this with the fact that the business owner is spending less time on the area he doesn't particularly enjoy (production) and more time in the areas he is passionate about. Clearly, this goes down as a substantial win.

This simple hire has had a monumental impact on valuation in two ways: First, it has increased bottom line results thereby increasing cash flow and the value of the business, and second, increasing the multiple on the business (the number by which you multiply the income [earnings] by to arrive at a value), given the reduction in risk (not having the business tied to the owner).

At the other end of the spectrum are businesses that continue to hold on to legacy employees. Many of these employees have been with the business for decades and unfortunately, some of them should have been transitioned out many years ago. Legacy employees can often cause the business to become static, and can become very defensive when challenged about their backgrounds and position. In many cases, these issues come to light during challenging times (such as when things go wrong in their particular area of expertise or in the midst of a deal).

We find that many business owners struggle with these types of employees primarily because of their tenure with the business. They've been there for so long the owners feel a sense of loyalty to the employee. Letting go a legacy employee can be extremely difficult given the emotional ties that many business owners have with these long-term employees.

Making moves around employees can be a daunting task. The difference between a 20-year employee and a legacy employee is quite simply, performance. Business owners should surround themselves with the resources to make the right decision around employee hiring and retention. Having the right mix of employees can not only substantially improve morale but can boost valuation and profitability as well.

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David Tolson is Managing Director of CapitalValue Advisors, LLC. Since 1992 David has worked in small and middle market based businesses in operations, sales, and marketing, and has extensive experience in appraisals and mergers and acquisition. He is widely regarded as an expert in middle market private company valuation. He has conducted numerous seminars, taught senior level university courses in organizational management, and been featured as a special speaker at the graduate level on strategic planning and acquisition strategies at both Colorado State University and the University of Colorado. Additionally, he is the co-author, along with Chris Younger, of the book Harvest: The Definitive Guide To Selling Your Company.

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