Your Number Two Is Already Gone

Right. Well, used to do it that way 10 years ago, but you know, that's why we're not revisiting this when technology has changed and why don't we revisit that back? I think also it's, you know, showing what seems to me, us being as, wow, we've got a person I don't have to worry about anymore so I can focus elsewhere. It becomes ignorance in terms of we're ignoring them, right?

Our number two. And so now we're naturally focused on other things, but number two feels like, well, I'm doing everything you want. Why am I not getting any attention? Good or bad? Right. Or why is it that I'm getting a 3% increase when I'm doing three people's jobs that you've asked me to do and I'm doing them well, why am I getting a 3% increase when inflation is 7%?

Right. Right. And so I think those are the things that you have to start looking at is how are we treating our people that we've asked them to do these things for that we train them to do it our way versus what the market actually sees them, right? The market says, I'll give you a bump up and increase a truck and a clear path to the next steps going forward.

When we placed band-aids and, you know, thrown things at people. And now they're making less than somebody, if they're making less with us than if they went somewhere else. Right. And that's the big thing too, Jon, is, you know, how are we valuing our folks or what typically happens too, is we hire a new person because of market rate, but we've ignored the people that have been working there and they're making less than a new person.

Absolutely, and they have so much knowledge. So it's institutional knowledge. Their efficiency is through the roof as well, and they totally get the business. So you can't overlook your good people, and especially somebody who's senior in the organization. And like, we gotta say, like our number two's, like I hope they feel loved, you are loved. They know who they are. They're listening. So yeah, I mean, like valuing your team members is super important because if you don't, like the cost of losing somebody like that is huge.

Can we like dig into that a little bit? Is there a way to put a number on it? What really happens when the number two leaves? Oh, sure. So from a cost perspective, right? It's just not their salary. It's a huge multiple of it because, and we'll get into this in Ryan's Fun Fact here, but it's definitely more than a year's worth of comp. And if you were to replace that person with a skill set, now you're paying fair market value if you haven't been, plus recruiting fee, right, before they even step on the first day of work and they might know your systems in terms of your front end, your back end, those kind of things.

However, they don't know how to do it your way. So now they're stepping up into that role and having to learn on the job. And it takes them months and months and months, especially the higher up the ladder they are, right? It's just not about jumping in with both feet and being able to do it your way from day one. There's a lot of things there, but she was invaluable, right? She knew every client, she knew all the workers, she knew when to schedule things and when not to schedule things, how operations worked, how marketing was working with that. So there's gonna be a ton of slippage there, right? No, we like Val. We don't really care about you, Mr. Owner. Like, where did Val go? We want her to — we'd rather work with her, right?

Plus, you know, she was a buffer probably in terms of from the owner to the field staff, they might've had a great relationship with her. I want to go wherever she goes. I want to go with her right now. We could be at the threat of losing employees and so we got client relationships, right? We got employees. We got workflows, right? She's been asking for a scheduling system, so she's been doing a lot of workarounds, right?

Not to mention, if we haven't had those processes documented, they probably live in her head and out our institutional knowledge goes in that thing. Because I don't know about you, Jon, but you know, I forgot how to be a bookkeeper. I forgot how to do these things in my role that I'm in now. And so I, if I were to jump back in, I need to retrain myself.

That takes a lot of time. Even when I first started the process and built that process, things changed from now and then. Right. And so your P&L, there's no line that says lost Val cost. Right. It shows that we've lost money or we've had to appraise it with salaries, but we don't have that opportunity cost lost. We don't have what the actual loss is because now we have three people doing her job, not just one, or three people doing parts of her job, just not one.

And I think that's something that we need to think about too, is when we're looking at number twos is that they're allowing us to get off the treadmill. When they leave, we've got to jump back on now and we've got to figure things out. And now we're the bottleneck for progress. While we're trying to look to replace that person, which if we haven't done a really good job training people, that person's not from within.

We probably have to go outside and pay all those fees. And if they are from within, right, there's a lot of things that go on with that as well. Yeah, it's huge. I mean, a lot of times, and that number two is the complement to the owner, right? Like, the owner's got gaps and weak spots, right? Like, and the number two, the person integrating their business, if they're the visionary, this is the integrator we're talking about.

And they've got those skills that the owner not necessarily is in their wheelhouse. So, you know, it's not just retraining and going and learning those things again. Sometimes it's tooling up in other areas. So it's a real knockback for the business. So yeah, got to look after your people here. I know we're going to get into that and we're going to get into the formula for, you know, long-term creation of value for our team members.

But let's go to Ryan's Fun Fact. Fun fact, study after study puts the cost of replacing a senior employee at roughly one half to two times their annual salary once you count recruiting, lost productivity, and ramp time. For a key number two, it's the high end. Wow. So losing a person can cost you a year of their pay or more. Yeah, absolutely, Jon, right? For all the things that we mentioned in the previous segment here.

And it never shows up as a line item called we lost Val, it shows up as missed deadlines, slipped clients and an owner back in the weeds, right? Your P&L is very good at telling you what you spent and completely silent on what you actually lost. There we go. Time for a quick break. This time brought to you by Napco Painting Contractors out of Napco. Napa, California. Got the city named after them.

And they're that good that the city should be named after them. Yes. And they're a fitting sponsor for our retention episode because read their reviews. Their clients say things like, we've used Napco for 20 years. That kind of loyalty is the whole point tonight. 20 years plus in Napa Valley, residential, commercial, interior, exterior, a dedicated fine finish shop for cabinets, plus estate and facility maintenance, and their genuinely eco-friendly, green practices across the board.

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And by the way, folks, if your number two never leaves you, please go see a doctor. That's what we're doing. We're constipating our number twos. That's what it's all about. That's retention in the wrong way. So let's get back to it. Make the case in dollars. Why is keeping them almost always cheaper than ever having to replace them? Well, because retention is a rounding error, right?

So if we're going to replace Val, it's $140,000 to $190,000 plus six to nine months of degraded output, the risk it doesn't work, and then you have to run the whole play again if it doesn't. Right. If we stick with her and we have a $20,000 conversation, that's the whole bill. Seven to nine times cheaper than what we actually know will work versus what we're hoping to and maybe rolling the dice.

Plus you have recruiter fees, plus you have ramp up fees, plus you have personality conflicts. There's a lot with the unknown. So sometimes the devil you know is better than the devil you don't know. But if this person, number two, has built their way up, is the right person in the right seat, is an exemplary employee that is your cash, your core values. You want to keep them.

Now there's another way around this is that you don't want them to hold you over a bridge and say, listen, we don't want to have a hostage situation where they're holding us hostage, right? So there's a side of that that we have to be careful of. But there's one question, what would you spend to avoid a six-figure problem? Right? That's what losing them is about. That's the answer to that question.

So if you push back on it, that is a very fair thing. Well, you know, if I brought somebody in, it would be cheaper, might be better, that kind of stuff. Now we're talking with the person exhibiting if they really belong in your company or not. But if this person really belongs in your company, it's very easy. Look at what the fair market value is. Look at what your competitor who would love to have this person, give to that person to essentially run their company the same way that they're running yours, right?

Compare it to what you're offering them and make the offer ahead of time before they even have to go and look around. Gotcha. Yeah. Makes total sense. Let's dig in here further. Let's talk about the toolkit for how you keep people long-term beyond just handing out raises, how you bolt a key person to the business long-term. Well, for a true number two, you need to pay well above what feels comfortable and still come out ahead of replacing them.

Right. That discomfort really becomes the signal. And here's the replacement math, right? You're going to an unknown that might not fit your mission, your values over the long run. Might be a quick fix and imagine if you had to do it two years from now as well, going through the whole thing again, right? Or you can give Val $20, $30,000, a path to success, a path to equity, right?

Who's helped build this company for you, a car, whatever that might be, 401k, stock options, would you be better off for it than replacing that person two times in the next four years? Heck yeah. No brainer. That's probably one of the best investments you'll ever make, period. You get peace of mind for an extra $30,000 and that person gets a path that hey, maybe one day the company runs without you and that person is the number one now.

And now you're just collecting a check on the beach, drinking a mic there. Awesome, love it. Yeah, and I mean, that's the vision for most business owners anyway, right? Like, if you don't create and enable a leadership team, you truly don't have the business where you can step away from it. We've already talked about how the business is valued, whether somebody will come in and purchase it.

So if you don't put these steps in place and have that valuable integrator, number two, whatever we want to call them, then really you're holding yourself back. You're missing out on the opportunity to be able to grow and grow the business. How do you layer this, Ryan? What comes first? Well, the first thing that comes first and every great HR survey will tell you that money isn't a factor, but it is a factor, right?

And take something out of Dave Ramsey's book is that he makes sure that he does a comp salary every single year, looks at it, and then make sure that he pays his folks fairly. So fair comp, that's what you need. Pay them at or above market, depending on what their purpose is and how they're really driving certain things, right? Give them a bonus. You can give them a stay bonus.

Hey, thanks for sticking around. You can, or a retention bonus, right? Or build them bonuses based upon how well the company does based on things that they actually directly impact, right? If that was the true number two in driving the P&L, then give her a bonus based upon what's falling down to the bottom line, right? Before the accounting tricks that happen, right? The true way of operating that company, right?

Great salesperson should not only be compensated on a sales goal, but also on a gross profitability goal, right? Those are things that they can actually control and do. The better they do, the better the company does. And the third one is, out there, if you don't want to give real equity to these folks, give them phantom equity, which is essentially saying that I will give you ownership, quote unquote, okay, make sure that it's there.

It's not real ownership, but that it is directly tied to the company's value, right? And they can get that as form of a bonus yearly, which means that they don't necessarily get a piece of the pie at sale or you can make it as part of that as well as that, you know, build, help me build my company up from $5 million to $10 million valuation, I'll give you 10% of that along the way and at end because you're helping me build this, right?

So there's a lot of ways, Jon, that you can make somebody happy to stay. That's worth having to keep around. And that's another thing too, right? If they're not worth it, don't worry about it. Attrition is going to happen to you. Have a plan for it. Make sure you have next person up. But if they're worth it, this is what you can do. Awesome. Yeah, really. I mean, you're not just buying their labor, you're buying a reason for them and you to still be here in a number of years, right? So those are different opportunities. Okay, time for Jon's Two Cents, marketing tip of the week.

Market your team like you market to your customers. So my two cents is a twist on just generally marketing your business. You spend real effort on your brand for customers. So spend that same effort on your own team and your employer brand. Your best people are constantly getting recruited. So polish yourself up. A polished competitor with a great careers page, a clear story looks more exciting than the place that they've stopped being noticed at.

Making sure that people see you. Familiarity with your brand makes your own shop feel like it's not a challenging place to work. So you market the opportunity inward? Yes, indeed. That's exactly what we're doing. We're telling the story of where the company is going, where they fit into your organization. Recognition wins publicity. So make staying with their existing employer feel like a choice that they have to keep making, not a rut that they're stuck in.

So retention really is just about internally marketing. My one step this week is to sit down with your key people and paint the three-year picture out loud where the company's going and the specific role they're going to play in getting there. Most of your people will never have really heard you say it. That conversation is free. It's one of the strongest retention tools that you have internally and also market that externally.

Marketing tip of the week. Good stuff, Jon. All right. And it's nice that it fits right into this episode. It's like magic. And that's crazy how that happens all the time. It's almost as if we think about these things. One more. Exactly, right? We actually do think about some stuff. Yeah. All right, more from Napco Painting Contractors in Napco, California. Just kidding, it's Napa. The angle here is the fine finish shop because it's a lesson in keeping skill in-house. Right. One of their cabinet maker clients said it best in a review. 47 years building cabinets and he stopped doing his own finishing because Napco's was better. He said a bad finisher can destroy great cabinets.

Which is the whole retention point in one sentence. A bad finisher destroys great cabinets. A bad replacement destroys eight years of client relationships. Same sentence, bigger cabinet. That is right. Napco does residential, commercial, interior, exterior cabinets and fine finishes. Estate maintenance, all eco-friendly, 20 plus years in Napa Valley. As a Canadian, I'll note they do serious exterior work in wine country, which is a nicer climate to paint in than anywhere I've ever held a paint brush.

That is my one. That's your one, Napco Painting Contractors. NapcoPaintingInc.com, 707-255-4359. Again, that's 707-255-4359 in Napa, California. Elevating spaces and enriching lives, just like our quality advertisement. That's right. And if you would like to be a sponsor of our episode at zero cost, just slip us a note and we'll make you the next sponsor in our poorly framed sponsor ads. Yes, we have to beg for it.

All right, Ryan, let's tie this to the exit. So what does an unretained, unlocked in number two do to what the business is worth? So let me say that a buyer loves a strong number two, right?

And that really frees up the fact that if I've got a good person I can rely on that will stick around and help me continue to run this business, a buyer will pay a lot, right? Now we're not owner dependent anymore. Now it's company dependent. And my dependence has shifted, but I know that owner's got a six-month plan. Hand it over. I can rely on this person, build them up, let them continue to do the operating, pay them well, stick around.

Right. The problem is, and I've seen this a couple of times where owners have taken on a new, has bought a new company. And the first things that happens within a month is that key employees are leaving. Right. That's their time to say, you know what? I've been wanting a change for a while. I haven't been treated right by the old owner or this is my time to retire.

I've got enough money. Let's make this change now. And the buyer is left holding the bag. Now, whether this has been planned in advance or something to that effect, or, you know, the owner knew about it. Just hang on. I'll leave you there. And I've seen it a couple times where key employees have left. I've also seen it a couple times where key employees where the owners held off on raises so that their EBITDA was higher.

And so the new buyer now comes in three months later and now has to give well-earned and overdue raises to keep the key employees there. Right. So what kind of relationship one did the old owners have with these folks? And now the buyer is now by doing that, having to build their own relationship and sell, tell them, hey, I want you around for a while. So it can go both ways, but if we don't have to deal with that, if a new buyer is comes in, everyone loves them.

It's worth their weight in gold. That buyer is going to pay a premium. They're going to be able to, you know, from this Main Street millionaire thing where people are buying mechanical contractors have no idea what they're doing, they're just buying a business. Their reliance on key employees is huge. And so the key employees can really show the new buyer that it was worth every penny and that they're worth every penny as well, and to make sure that, you know, they can grow together in terms of running that business, increasing that business.

And then maybe at one point they're given a path to a phantom equity, and those sorts of things. So it takes away key flight risk. It takes away the owner dependency. That's really what a buyer is buying a premium for. Awesome. I think it's pretty clear where the value of the business is tied to a strong team, like we've talked about it in multiple episodes before, buy box, et cetera, what — exactly what buyers are looking for.

And this is a key piece of the puzzle. If you have an unstable team, buyers will overlook your business. Okay, so let's start to close up here. Owner is driving home, realizing the number two has gone quiet. What is the one thing they do this week? Sit down, have a conversation. This person has been working with you for quite a long time. Maybe they worked their way from the mailroom to the boardroom.

It's time to have that conversation. It's not a renew, a review. It's not a project update. It's you talking matter of factly about what the future looks like. Build a future for that person. They've been learning alongside of you. Yes, they haven't had your mentality. They haven't had to have the risk that you have, but a good number two is worth their weight in gold times two or three, times recruiting fees, times learning curves, times slippage, times employees leaving right from the relationship.

And if you're afraid that it's going to open up a can of worms, the can's already been open. Right? You need to go ahead and address it. You just haven't looked inside that can. Get there, hear what they want, hear, maybe you're on the same page. Everything's good. Copacetic. Fantastic. Give them a stay bonus. You know what? Thanks for the nine years of hard work. Sorry, we couldn't give you the raise that you deserved two years ago, but now we're doing well again.

Here's some money. Really appreciate you. Do it out of the norm, you know, do it spontaneously. And do the replacement math before you do this conversation, do the replacement math. How much will it cost you not in what you'll lose on the P&L, but what you will lose — what you will have lost in the future from that. Especially if you have to replace this person two, three times in the matter of a couple years.

What customers will leave with them, what relationships will leave with them, what workarounds have they doing because you didn't listen to them because they wanted new software that would make their lives easier, your business more efficient, and actually your bottom line bigger. Amen, brother. And I think this stems from just looking after people, right? Like this is where it's got to come from. We've got teams of people, they're all living their lives and they have expectations of what they want, how they're gonna grow.

Are they getting married? Do they need to buy a house? All these sorts of things. And if you don't sit down and look at what your team members need, and really you're not getting into the value that your business is providing to them. So I think you just gotta go back there and check in on these things. I know we have these conversations with our people. I have a fabulous number two.

She's an amazing integrator. Naila, I'll give you a shout out all day. Awesome. We're having these conversations, and I hope this episode is just checking some boxes there for her. So I think it's really important to look after your people well and look at what they need in their lives. No, I agree, yeah, and I'd like to shout out to my integrator as well, Naila. Wait a minute, Jon, dude.

Whoa. Okay. Oh yeah. I think all three of us are going to have a conversation later on. Just kidding. Oh, Brian, you know who you are. You know, but you have to have that, right? It's crucial to that, but more importantly, they need to know where they — that they're appreciated. Not only just in words, it's not like, oh, you know, when you go to dinner and you're like, you know what, you did such a great job serving us.

The food was fantastic. By the way, that's your tip. People can't live off of gratitude. People don't want to make $20 an hour going forward just because they like you. They have families, they have dreams. They need a path. Give them a path and let them continue to rise to the occasion because at the end, when it makes your life easier, two, it probably makes your company better, right?

And three, it makes it far more sellable. And that's another, you know, multiple or two, that we're talking about to get away from that dependence. So it's time folks, if you haven't had that conversation in a while, it's past due. Get on it. Hopefully not too late. Right. Absolutely. Get on it. Okay. Time for the takeaway, Ryan. The person you can't replace is usually the one you stop noticing.

And by the time they tell you, they already had decided that a long time ago. Make sure you have the raise conversations. Make sure you have the path. Don't stay as you are because it expires over time. Recruiters are out there. Your competition is noticing. They want to poach them. Losing them just doesn't cost salary. It's a multiple of it. Not to mention the knowledge that walks out the door, the clients, the employees that will follow.

Retention is a rounding error when you compare it to replacement. So make sure that you do your math. Look at the fair market value. Pay that. Pay above it. Give them a path. Give them a date. Give them phantom equity. Give them real equity. Make sure that you take care of the people that are taking care of your business. And when you do that, your business will flourish.

Love it. Great episode, Ryan, super important. Yeah, I think we're gonna dig deeper into other HR things in future episodes. I think episode after next is what we got planned out for some more HR advice and recommendations. But yeah, great one. Yeah, Jon. Yeah. We just started scratching the tip of the iceberg here. We're going to be taking on a lot more topics in our space and all the ones that are taboo and not.

So I think that's going to be great. So that's a tease for future episodes. And you know, Jon, I do appreciate you. Our listeners appreciate you. So you know what? I'm going to double your salary because we appreciate you. Thank you. Wow, that is a, I'm going to go buy myself nothing as a reward. Well, Jon's two cents became Jon's four cents. Well, again, 1.4 US cents.

So what am I going to do with that? Can't even get a Timbit for that. I mean, you're almost at three US cents. So. Yeah. Love it. Time to go into shopping spree. All right, folks, over now. Thanks again. Hasta luego!

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