EP23 - Foundations of Transition: Building Leadership Capacity

In this Journey to an ESOP and Beyond podcast episode, Jason and Makenzie continue the Foundations of Transition series by exploring the sixth foundation: capacity building. Framed through the lens of leadership transfer, this conversation examines why a business is only truly transferable when leadership, decision-making, and organizational judgment can transfer as well. As owners prepare for succession, an ESOP transaction, or any future transition, developing leadership depth becomes a critical part of preserving and growing enterprise value.

Throughout this episode, Jason and Makenzie introduce the concept of “leadership debt,” describing how organizations accumulate risk when founders and owners remain the primary source of decisions, relationships, and problem-solving. They discuss the importance of transferring not only tasks, but also the context, authority, and judgment behind those tasks. Through practical examples and actionable takeaways, listeners are encouraged to identify opportunities to build leadership capacity, strengthen management depth, and create a company that can continue to thrive beyond the daily presence of its founder.

Transcript

[0:11] Welcome back, everyone, to the Journey to an ESOP and Beyond podcast, where we seek to make all things related to employee stock ownership plans, both accessible and understandable. I'm your co-host today, Jason Miller. And I'm Mackenzie Wirth. And we are exploring the sixth of our 12 foundations of transition. And today is about capacity building within your company, which, said another way, is really about transferring leadership. So we're grateful that you're here along for the journey still. We hope that you are finding these particular foundations both useful. It's probably the key part here is taking something of use from this. And not just entertaining, even though we try, probably fail miserably at entertaining. We try to do our best. So where I want to start with this is making the claim that a business is only transferable if leadership is transferable.

[1:24] This isn't just about succession plans and org charts and whether there's a smart person in the next chair. It's about whether the company has transferred enough judgment and authority, relationships, and decision-making capacity to keep moving when you as the owner or the founder is not the answer key.

[1:49] So the goal is not for you to matter less. The goal is for what you've built to matter more than your daily presence within the company. So Mackenzie, from your seat, when we're looking at a company approaching a transition, what are you trying to understand about whether the business has real leadership depth versus just people with titles? Yeah, I think this is something that comes up pretty often. We'll hear owners we work with say, oh, if I leave tomorrow, the business won't continue to run at the levels that we've been operating at. Or, you know, I have to stick around until the debt is repaid to me so that I can get repaid or else it won't happen, which is kind of a red flag in itself and why we're discussing these things today.

[2:54] So I think when we have those conversations and we try to understand like if that's the first reaction we get then that kind of indicates that there's not much of a leadership depth or maybe they don't truly.

[3:12] Understand or know where their depth is currently at. Maybe it's better than they think. Maybe it's worse than they think. But I think it's how we understand it is kind of breaking down who is always making decisions or where are decisions made? Who owns what? Who sees and identifies problems and responds to problems? Who is trusted internally? Who does the owner trust to help make decisions? Because realistically, an owner can probably make the big decisions, but there's no way that if they've been running a company for 20 years that they're the only person in the company making a decision. So who else is it that they trust? And just building off of those questions and answers to figure out where the depth is currently sitting.

[4:13] I think those are great questions that whether founders explicitly ask them in the context of this next generation or whether they just know them and hope that the next layer of leadership implies what's important from activity, I think is going to be really key to moving through things. So we're going to introduce a concept that I like because, again, my entire career has been around debt. So I understand and speak things in the form of debt, unfortunately or unfortunately for all of you, because I get to talk about it every week in some way, shape, or form. So I want to introduce this concept of leadership debt.

[5:09] And leadership debt is like technical debt or financial debt. And it builds when the owner keeps solving problems personally, instead of building organizational capacity to solve those problems. And it feels really good in the moment. Um, and every time you as a founder or you as an owner or you as a leader, just go, Oh, you know, I, I got this call. I'll just, I'll just handle it. Or this problem landed on my desk and I'll, I'll do that. Or, you know, Jim called in and, you know, I, I know Jim. So I, I, it's been a while. Let me catch up and then solve Jim's problem. Uh, or I'm the one that has the relationship with the banker and I will work with them in order to translate whatever issue comes from that. I know, Mackenzie, that you're upset. So I'm going to come and handle what's going on with you.

[6:14] Or I know exactly what's happening with our margins on this project. And then here's a big one, because the life of the company really does live inside of you as the owner, as the founder. and you may remember things that you've promised years ago. Ah, I remember when we said that to Ed and because we made that promise to Ed forever ago, I should be the one responsible to handle that.

[6:44] But every time you absorb that problem without transferring the judgment, those questions that you were asking, like, hey, how can we, why do we make decisions like this? And then who sees this? And how do we look at margin? Every time you handle a problem without transferring the judgment, what the company is really doing is it's borrowing from you as the owner or as the founder.

[7:14] And when the company borrows from you, well, eventually the interest is going to come due.

[7:22] So capacity isn't headcount. It's the organization's ability to really absorb the complexity of it as an organism without sending every question and every difficult question, every easy question back to you as the owner. So Mackenzie when you hear the term leadership debt what what would that look like inside a real business not not necessarily theoretically but kind of what are the symptoms yeah um I also just wanted to add to what you were saying or just what comes to mind is that it's kind of just the easiest way to handle things when you're you have that mindset and it's natural to think that way and to be like oh I've done this or this is like the whole thought process you were explaining it's just more it's easy and efficient or at least that's I mean it is in the moment, and it's like I'd rather do this than spend another 15 minutes teaching this person how to do it.

[8:26] So it is hard to get out of that mindset but I think the first as you said that interest is accruing and coming due and that's what you're um I guess risking by, not spending those 15 minutes with someone where maybe you're only spending those 15 minutes one time and then the next time they can handle it so I think what it looks like in a company can be.

[8:59] Can be various things are you copying your owner or leader on every single email, are you waiting to start meetings when your leader joins or waiting for the leader to start the meeting and kind of run it, um are your customers and clients only relying or will they only listen to the owner's, advice or answers do they write off answers from other people or say okay that's great but I also still want to talk to whoever um do people wait for permission to do things from the owner or their leader before just acting on it, even if they technically have that authority. So I think it can manifest in a lot of different ways.

[10:05] I think it's important to make the distinction that you can have great people and still have a very poor transferability of all the things that you just mentioned. And your talent may be real in the roles that you have supporting you that do all the functions that are required for your business, but the system hasn't necessarily taught the talent how to carry the company. If every meeting waits on your interpretation as, as the owner, as the founder, as the leader, then the company isn't building leaders, it's building an audience.

[10:53] I think what you said earlier is huge about if your leader is just providing the answer and not the thought process that led them to that decision or that answer. You can teach someone, okay, this is the decision we make in these circumstances, but you're not teaching them why, which would allow them to either arrive at that decision under different circumstances or just be able to interpret things differently.

[11:31] Like they need to understand the why. And I think that's where we use the word delegation and we misunderstand the purpose of delegation. It isn't for someone else to just perform a task. And it also can lead to owners believing that because I'm handing tasks off, naturally, the people that I'm handing them to will just grow into them like I did or like I will or like I expect them to. And that handoff becomes the only system or the only methodology to building successors. But the hard part isn't the task. And to your point, the hard part is developing the judgment underneath of the task. I remember for a period of time when I was working with individual clients with investments.

[12:35] And the the emotional and psychological impact of having money at risk throughout cycles of the market. And you can never know what the market's going to do. And you're going to have up days. You're going to have down days. And I remember reading an article and I can't remember the name of the article anymore. I remember what it looks like. But the key takeaway from that is what and why. And it the recommendation was in working with your your clients if they understand what they have and then why it's part of their portfolio then it helps to smooth out the emotional uh drag or impact of a big red day or a big green day uh in in their underlying market then that what But in that why, it's translated to so many different parts of leadership for me and for in career and working with clients just in general. Because if you understand that piece, well, it's going to make a lot of sense. And if you get the why behind it, then you can tolerate some variability, not necessarily in the market, but whatever's happening in your business or how good or bad your day is from other pieces.

[13:54] And if you were, as a leader, if your successor only knows what you decided, they're basically inheriting your answer. But if they understand why you decided it, then now they're inheriting part of your leadership.

[14:12] How would you advise an owner to start transferring judgment without turning every day into a lecture? And don't say anything about how often I provide lectures.

[14:27] I would say, one thing that you do that I appreciate and helps me create that judgment is just asking me, questions that you think through when you're making decisions so maybe what could change this answer, what matters most in this decision what are we foregoing or what's what's the trade-off, I think, one, asking that person questions to help understand how they are currently thinking through things. And then you can provide feedback on to, okay, well, I would have thought about this or I think this matters most. And then maybe even before that, give them a chance to kind of force them to talk through their decision-making so you can understand where they're coming from without your context.

[15:43] I think this is, I keep saying it, this is especially important when it becomes more instinctual and this just lends back to that early part of it's so easy for me to pick up and make it, give answers or to handle situations. But in keeping those, not only is that leadership debt being, is growing and accruing interest, But it doesn't allow for the same time and exposure that's created that instinct to start generating an instinct in you or in others and just in general. all. So where it's easy for leaders to go, oh, this is what I know to do. It's really based on that exposure over time to all kinds of different scenarios.

[16:43] And listeners, for you, it might be your history with a customer. It might be how you feel about the market for pricing. It might be who you've used before and when they come in like a vendor and someone who's really clutch and you need them for for this issue or that one and then we can't underestimate the value of scar tissue when things have gone wrong and you are operating out of i i want to avoid putting my hand on that hot stove again but if it if all of that remains trapped inside of you then it can never transfer.

[17:22] So one of the things that has really influenced my view of the the world in probably the last decade of my life is i keep coming back to the the phrase that the world is smaller than we think it is and.

[17:47] What I mean by that, Mackenzie, are you familiar with The Six Degrees of Kevin Bacon? I am not. This means I'm old. So there used to be this thing called The Six Degrees of Kevin Bacon. And that was any actor in Hollywood and really anyone in the world is only six steps removed from Kevin Bacon because he was in like every movie in the 80s and the casts were superstar casts that ended up being leads in other movies and other shows. And so you could within six degrees tie anyone in the world to Kevin Bacon. And I think that that is true. And as I was pondering this concept as we were preparing, I was thinking, I don't know that it's six degrees anymore with, you know, you've got social media and then people are more visible just in general. But it's not about visibility. It's about connectivity. But the world is flat. Not that I'm saying that I'm a flat earther because I'm not. Let's just get that out there. Organizationally, it's flat and it's really small.

[19:12] And when we apply that to leadership it's what are we thinking about the.

[19:19] The people who are that next generation, what world are we training them to expand into or to lead or to govern? And how narrowly are we focusing it? So if we just hand off tasks and we say, here's the task, then that becomes their world. And then if we expand that, then we should be looking at their department. And then if we expand that, then we should be looking at the company. And then if we expand that, then we should be looking at the market as a whole. And then if we start looking underneath of that, we start seeing the components that build that world, that create the dynamics around why it functions like it functions. Whether that's the market, or within the market, like how companies are structured, whether or not there's a family legacy to be involved in that, what the employee base looks like, what community that we're serving. And all that requires different development paths. So my question to you, founders, for you to ask yourself is, are you developing someone to run a function or are you developing someone to help carry the future of the company? So when you think about the future of leadership, how can an owner tell whether someone is thinking at the right altitude? Yeah.

[20:43] I think paying attention to, what questions they ask um when they're dealing with their tasks or when you're in certain meetings, what like at what level are they asking their questions is it more like okay what do you need me to do for this or is it bigger picture like how do we typically respond to this um what does this mean related to the company's cash flows or financials what does this mean for employees um are they asking like at what level are they asking questions are they, more broad are they more specific is it kind of just give me my task and let me run with it or am i am i trying to think like an owner or at a at a higher level.

[21:50] I think this is where exposure matters and if if you want someone to think like an enterprise leader then they need exposure to enterprise questions before they have the title, if i never see behind the the infrastructure like if i never see the infrastructure behind the the show right we watch movies all the time going back to kevin bacon right um if you think about indiana jones and the temple of doom and the big uh you know pulling off the idol and triggering the trap and then running through and the big boulder kind of comes after him and super entertaining um and then you go to mgm studios and they have like the stunt thing there and then you can see the edges of the stage and then how everything is is set up it just gives you a different perspective about what makes that world move to tell that story to an audience that ends up loving that story and that character enough to watch the movie a kajillion times in their lifetime um and then create more movies right uh i for for me um.

[23:10] I'm trying to think about how to say it.

[23:15] The community that we serve, and we talk about the ESOP community, when I look at what role am I filling that our team is filling, what are we driven to do? What do we love to do? And how do I create a space for the next generation of leadership within the organization like we're talking about here. But my view is how do we help create a more in-depth community of professionals that may catch a little bit of the bug or a little bit of the vision for ESOPs as a whole? And are we doing anything to help support the community in developing new leaders that isn't just directly, hey, one day I'd really like to retire and I would really like someone else to do my job. So far, far into the future. But if I'm just doing it for me and not doing it for the community and then for others, then how much am I shrinking my world? to do that? And then what opportunities am I limiting that next generation of leadership from obtaining that could make everybody better?

[24:40] So I think what I'm trying to say is that you try to get a broader view or perspective of the world and our place in it and bring that into how you teach or how you grow or how you invest in the next layer of leadership. Yeah, I think those are really good points. Yeah. Yeah. Yeah.

[25:24] That kind of gets us to the next spot. And... This is probably one of my favorite favorite parts about this whole episode so a lot of companies say that they want talent um and then they kind of punish the very thing that makes someone rare, and they take the person with what whatever it is that makes them unique so unusual commercial instincts technical depth um client empathy uh and being extremely analytical being a great operator And I know that listeners, you guys have on your teams great operators. And then when they rise to a certain level of proficiency or exposure or notoriety for all the right reasons, not the wrong reasons, when you recognize them as, oh, this is someone that can be the next leader or the next me or the next visionary. You bury them in the wrong kind of work because your leaders need to be well-rounded and those air quotes for those of you who are listening um and not not watching so talent continuity doesn't mean sanding everyone down into the shape of the same corporate rectangle.

[26:49] The goal is not to make every leader identical the goal is to make each leader's strengths useful at the enterprise scale so not only do you need to have give people exposure to those enterprise problems or questions before they have the title but in growing that next generation of leadership. It's allowing those strengths to be utilized in their highest and best use. So Mackenzie, how do you think about building structure around strengths rather than trying to fix every weakness to make someone look like everyone else? Yeah, I think that's why.

[27:33] To the whole theme of this podcast is you you can't just have one person that's the leader like you have multiple leaders that have their different strengths and you capitalize on those individual strengths and they're complemented with another leader who has a strength that maybe that person's weakness rather than kind of saying okay well this is your weakness let's make it one of your strengths or let's work on it. So for example, you have someone that's a visionary, a really good visionary, but maybe they aren't the same person that can like execute that vision. You need someone else to do that. Or you have someone that's super technical and analytical, but maybe they aren't the best with translating that to others or speaking. Communicating the technical things to your clients or whoever it is so kind of, always having or looking for who has the greatest strengths that are good for a leadership position and then what do they need who complements who and how.

[29:03] And that's where we focus on what we're trying to do in this episode, this foundation, which is building capacity. And it's not an indulgence to do that in their career or in that individual and going, oh, they're really good at this. I should make them more well-rounded. It's design. And your team, your team dynamics, your company dynamics, how your business is successful and will continue to be successful are relatively unique to you. There are certain universal truths around business and whatnot, but how it gets exercised really depends on who's sitting in what seats and then what you're doing to design with them in mind, not design around them to some other force that's just out there in the world that helps your company to be successful.

[30:06] So owner, we hear this a lot. Founders wait to transition or to consider a transition or to eliminate certain types of transitions, like potentially an ESOP from some other type of sale or movement, because their designated successor is not ready.

[30:33] And readiness comes from reps, is the comment that we have written here. So readiness comes from reps, and you can't observe your way into leadership.

[30:50] So if we were to look at the boardroom as a gym, McKenzie, and the owner is working out all the time, and the other persons with responsibilities are just watching the owner work out and then the owner decides, I'm not going to be here anymore, but here are the weights that I was using. Go ahead and pick those up. I'm out. How do you think that would go over? Yeah you're just set up for failure I think um you may understand you know the the form of the exercise from being the observer and you understand where how how much weight to use for what exercise but that doesn't mean you can actually do it um you haven't practiced it you haven't built up the endurance or the strength to.

[32:03] In this context, you know, lift the same weight that the owner is. So I think how this comes into play in real context of the business is, are you letting someone watch every meeting or observe every meeting? And then when you're ready to hand it off, you're gone. And now they're running the meeting. Without any kind of bridge or, you know, letting them lead a meeting with you there as kind of the crutch in case something goes wrong or if you need to step in until you get that person to the point where they're comfortable on their own. Are you letting them completely own a relationship that you've owned or like are you transitioning a relationship to them not just overnight but over time so that they can really own it are they making the first recommendations for, circumstances or decisions um are you giving them the practice and the reps that they need to fit your shoes so to speak Thank you.

[33:29] I like this line. It says that you cannot create a successor by letting them watch you be indispensable.

[33:41] And that idea of leadership debt, this is where it manifests. If the only thing that you ever saw in me was coming in and making every decision or making all the critical decisions, and not giving a mental path to how or why that decision was made, that's not an investment. I think one thing too that you said earlier that fits in with this piece here is the scar tissue. When you let someone, for example, own a meeting or own a relationship, of course they're not going to do everything perfectly and you will have mistakes but they need to face those mistakes and learn from those mistakes to build that scar tissue and understand what they can do better next time or what went wrong in this scenario like that's part of the growth into that role.

[34:50] What could this mean to numbers, and i i asked that because we've uh if we were the type of leader that created an audience uh and in creating that audience we never allowed them to work out the muscles to build the discipline and the strength to to stand in.

[35:21] We've accumulated an immense amount of this leadership debt. And when it comes to transaction time, this all gets exposed.

[35:37] And it has a numerical impact on the value of your company. And when we look at transactions and ESOP transactions, their net of excess working capital, and then their net of debt. So whatever your company is worth, from its ability to produce the future cash flows, we figure out that number, figure out the number or the amount that's required to keep the engine running. And then below that is any outstanding debt gets netted against that. And we haven't, we've accumulated this, what we're calling leadership debt. That's not going to show up on a valuation report as a number below the line, but it will show up in that number somewhere in the interpretation of the ability for the company to continue to produce the value that it has under you because of you and what you're currently serving. And you're not always going to be there.

[36:39] And that's part of the reason that you're listening to a podcast like this as you are evaluating what the next step should be and could be and how long you do want to stay around and why you want to go through a transaction like an ESOP transaction. And there is a tangible numerical value that gets expressed in your company's worth that we're trying to highlight here for you to address now.

[37:09] Sooner rather than later. And for our listeners to to kind of wrap their head around how it really impacts your value well you can come up with this forecast over the next x amount of years but if you don't have if you plan to be gone or you would like to be gone in one to two years then having that lack of management depth or leadership depth or on the flip side a lot of leadership debt that increases the risk of your overall company that whoever is valuing your company cannot buy into this forecast if the way that you've been able to hit these numbers in the past is because you've been kind of the only person holding the weight. You don't have management depth. And without you, how can they have confidence that those numbers will be met? So it increases the risk of your company, which has an inverse impact on your value.

[38:25] Now that we've had the hard conversation, let's leave our listeners with some things that they can actually do this week. Because this is one of those topics that can sound really big and kind of abstract until you realize that taking those first steps can be very concrete. So, Mackenzie, walk us through some tips that our listeners can take away and start working on today. Yeah, one I really like that we have written down here is the owner writes down everything that comes back to them. So every task or decision and categorize it into one of three buckets. Either only I can do this right now, someone else could do this with context, or someone else should already own this. I think that could be really eye-opening. Yes, and just thinking through that, I can imagine what that journal would look like after a week. And the question is, what comes back to you not because you're the best person to do it, but because the company's never built another place for it to land?

[39:49] Another tip i like is in meetings with the leadership team or or manager whoever it is, intentionally hold your thoughts for last so that you're allowing others to form their own answers and judgment before you're providing yours, I think that was your really polite way of telling me not to talk as much as I do not true, but I do like that one.

[40:26] Um, others, which I think we've, we've kind of spoken on is to start transferring relationships before you're out. So don't just maintain and own that relationship until the day you leave, and then it gets transferred to someone else work on transferring it over time so that when you are ready to leave, it's more of a natural transition and also not, you know, shocking or blindsiding to your customer, client, vendor, whoever it is. And I like this next one a lot, which is create a do not bring this back to me list.

[41:13] And listeners, for those of you that are owners or founders, I hope that that's empowering and freeing to think about, man, there are certain things that I do not want coming back to my desk. And there are things that when you put on that list that just makes sense not to do and to have someone else carry the responsibility for that unless it's something like existential to your business right like your your major customer that represents half of of your revenue uh is having an issue like that that should land on your desk regardless of whatever's happening, But below certain ranges or thresholds, it should be something that's freeing to you that you probably do in some disciplines, but maybe not in all. So consider expanding your world a little bit and creating that. Do not bring this back to me.

[42:15] I think some good examples we have relative to that is are you having a say in who gets hired at every single level are you are you really concerned or do you have to be involved in the hiring of for example an intern or should you really just be involved in anyone that's manager and above um are you giving the okay on certain pricing or even like expense reimbursements within the company at any dollar amount or is it just at a certain level so what um, maybe you're still involved in decisions but you're applying you know thresholds to them.

[43:09] I think our last tip here is identifying kind of back to our strength conversation or, you know, capitalizing on people's strengths rather than focusing on their weaknesses and building them up. Identifying one rare or unique strength per key person or per key leader.

[43:38] And then thinking and asking yourself what structure or what support or what other quality complements that strength to make them more valuable to the company.

[43:54] Again the point of this is not to make them a perfect clone or image or conform them in into something that you have in mind but it's to make the company more capable because they have a unique strength that's going to contribute to the overall value and culture and success of the business. So in closing, capacity building is not just adding people and not just giving people roles, but it's continuity and continuity. Throughout the organization. And it's not just names on a chart. It is really the deliberate movement of your judgment, your trust, your authority, and your context into that next layer of leadership. And those are the things that are transitioning, not responsibility and not tasks. Those are natural when the judgment and the trust and the authority and the context go. So, again, the goal is not for you as the founder or the owner to matter less. It's for what you built to matter more than your presence.

[45:14] Because if leadership can't transfer, then the business can't fully transfer, which is what we started with today. So start now before the transaction, before the emergency, and really before you've got nothing left to give. So we all run out of time. We all run out of energy. And if you start this now, you'll be better off for it. So listeners, thank you again for joining us in this sixth of our 12 Foundations of Transition. Like, subscribe, share this episode with a friend that might be struggling or having that same question around, man, no one can fill my shoes. What do I do? we think these practical tips will help you. Interact with us at journeytoanesop.com for recommendations for what you would like to hear from us, or if you would like our help with any of these areas. So with that, we thank you and we will see you next time on the Journey to an Aesop and Beyond podcast. Thank you. Thank you.