One CEO explains how he sold his company while retaining emotional ties and a paycheck.
Ever feel your business has outgrown your management style? That you really aren't having fun anymore? There is an alternative to the auction block
When it stops being fun, I'm getting out. At least that's what I told myself in 1975, when, at the age of 29, I founded Payday, a payroll-service company. I must have really meant it, because that's exactly what happened a dozen or so years later. After lots of hard work, I've managed to extract myself from my company while still retaining ownership. I feel I have the best of all possible worlds -- all the income and very little time commitment.
The first thing I had to do was to be honest with myself. Was leaving the company just a pipe dream that got me through the tough times? Or was I ready to commit as much effort to getting out of my company as I had committed to getting started?
When I woke up one morning in the late 1980s and realized running Payday had stopped being fun, I took a close look at what had changed. The company had settled down from its Inc. 500 fast-growth rate in the mid-'80s to a more sedate pace.
The start-up and fast growth had been a thrill-a-minute kind of existence that had challenged my abilities to think on my feet, build a team, respond quickly to opportunities, and persevere through some ridiculously tough times. As the rate of growth slowed and the administrative burden of running a larger organization grew heavy those skills became less important to Payday's success. I began to lose interest.
I was surprised to discover that the company had outgrown my management style. With 50 full-time people on the payroll, it had become too large, too complex for my seat-of-the-pants approach. And it had outgrown the skills of my two top managers as well. Easing them out and reengineering Payday was as demanding and as stressful a job as I had ever had. But even after accomplishing that, two things were very clear: I was not having fun, and Payday needed a "professional" manager.
From that point, it was easy to fully commit to leaving. I put the company on the market but quickly learned that it didn't make financial sense to sell it. Once I paid taxes on the profit, there wouldn't be enough left to let me simply clip coupons for the rest of my life. Besides, Payday was highly profitable and capable of supporting all my financial needs, was growing steadily, and had some solid prospects for the future. I had to take the hard way out by replacing myself.
In retrospect, I recognize five key steps that made my exit a successful one. The first was setting goals. Once I was committed to leaving, I wrote down what I wanted the results of my leave-taking to be: I wanted a stable company that would give me a reliable income, a company that would continue to grow, and no day-to-day responsibilities; and I wanted to take a year and travel around the world with my family.
Then I mapped out a course of action that would get me to those goals and assigned time frames to those actions. This is all stuff you've heard a hundred times before. But if you've ever used written goals to achieve your targets, you know just how powerful they can be.
Second, I had to select and groom my successor. I found that step to be the hardest of all. I knew what a professional manager was supposed to be, but how would I know when I found the right one? Even if I knew a candidate had the right skills, how would I know he or she would fit into the organization? I was convinced that it would be a mistake to bring in someone from a larger company who had no experience in an early-stage entrepreneurial company. Clearly, the best bet would be someone I'd worked with, someone who knew Payday and would take on the chief executive role with open eyes.
Fortunately, I found the right person in my company, a woman who had steadily worked her way up the ladder. She could take charge and was also a good administrator. That was my first CEO.
Once selected, my successor needed to learn the job. Over the next year I steadily delegated more and more of my duties to her. I made her president and I kept the titles of chairman and CEO. I came into the office less and less often. When I was comfortable with the direction the company was taking, I passed the CEO title on to her. And I let her manage the company according to her style. It was tough, and I had to bite my tongue so hard at times it felt as if it were going to fall off. But the transition worked.
It worked in no small part because of the third step I took. As I was bringing my successor along, I was setting up control and reporting systems. I was increasing my ability to track the progress of Payday even as I was decreasing the time I spent there. I got weekly faxes that tracked all key sales, financial, and operational indicators versus budgeted goals. I felt comfortable that I had enough oversight that I would not be surprised by anything that happened in my company.
The fourth step was to bring in an outside board of directors and formalize the governance of the company. That was an invaluable aid in the subsequent development of Payday and made me realize that I should have done it years before. Board meetings disciplined the management team, making it focus on goals and account for results in a structured way that never existed before.
The outside board members helped me grow into my new role and kept me from second-guessing my new CEO. Not being intimately involved in the company, they were able to bring to the strategic process a new perspective, which proved pivotal time and again. Plus, they helped mediate the disputes that inevitably arose between me and my successor.
Now I had it all together: A CEO to replace me, an information system that kept me in touch with the progress of the company, and a governance process that provided for regular reports from management. And, with the exception of options I had granted to my CEO, I still owned all of the company.
Of course, life is never quite so simple. A few years ago, with the board's approval, we decided to take Payday to a new level of growth. Unfortunately, that did not play to the strengths of my CEO, who had been at the helm for four years. Luckily, her successor was once again right under my nose. One of the board members took on the job in 1993, and Payday is back on a fast track. Today I check in about once a week.
But I still had to take a crucial fifth step. I had to change my thinking about what Payday meant to me. For years my company was a big part of who I was, emotionally as well as financially. I had to come to terms with the fact that Payday now had to be managed from a very different point of view. It was now simply the largest asset in my investment portfolio. It took me a long time to develop that perspective, and I still retain many emotional ties to the company.
What I need today are financial results, not emotional gratification. I need to be fair but tough with my management team. Just like the management of a large publicly held company, it runs the show but it is judged on the financial returns it generates. I can't let my emotions rule. I must be a dispassionate investment manager.
It's been a long, tough road, but I'm having fun again. I never did make that trip around the world with my family, but we did spend three months vagabonding in Southeast Asia. And I'm free to develop new interests without having to be concerned about generating an income. That has proved to be a new challenge and has been enormously stimulating. But that's another story.* * *
Russell S. Holdstein is the founder and chairman of Payday, a payroll-service company in San Francisco.