Chris: Hello everyone and welcome to another episode of Process Makes Perfect. Today I’m here with Scott Fritz. Scott founded a company called Human Capital back in 1997 and over the next decade, he grew that company to $170 million as an active angel investor. Since 2001 Scott has invested in over 30 separate ventures, and in 2008 he founded Growth Connect, a company that specializes in transforming businesses into assets through exit-strategy coaching. Along the way, Scott authored The 40 hour work YEAR, which is a book that chronicles Scott’s own entrepreneurial journey firsthand and acts as the playbook for getting out of the day-to-day in your business. Scott is a keynote speaker for entrepreneurs around the world and advisor a leader, and we’re excited to have him here today. So thank you Scott for being here.
Scott: Thank you. Chris. What an intro. You need to go on the road with me.
Chris: Sounds good. I’ll open for you anytime. So, I first met Scott – I’ll tell this story for the audience on how we met. I think it was coming up on 10 years ago through an entrepreneurship program. Scott was facilitating these workshops and I liked him so much that as I was transitioning out of my first business, I reached out to Scott first asking him to be a mentor. And then Scott replied with the funniest thing. He took me through his Focus Filter, his decision filter of how he decides whether he wants to do deals or be involved with someone. So, Scott, I figured that’s a good place to start because I thought it was funny that you wouldn’t even work with me unless it fit your filter.
Scott: Yeah. Well, you know, I’m a big believer in how you do one thing is how you do everything. So it makes it simple for me. And as I get older, Chris, you’re a lot younger than me, filters helped me feel young even though I’m not getting younger. So there you go.
Chris: Focus Filter, talk us through it.
Scott: Yeah. So the Focus Filter is in my book, I talk about how obviously it wasn’t like this in the beginning, but it starts with enjoy life. So Am I going to enjoy what I’m doing? Is it something I’m really going to get value out of? Is the person I’m going to be working with going to enjoy working with me? I mean it’s a two-way street and also is it, is it going to make sure that I’m able to still live my life the way I want to live it? So that’s number one. As I tell him, most people, well I tell everybody, but most deals that I look at enjoy life doesn’t measure up. So I pass. Secondly is make money. So if I’m going to enjoy what I’m doing, obviously I need to make money at it because I’m an entrepreneur. Earned a, I have, I have different ways I look at my personal life. But in the business realm, if I’m going to work with somebody, we gotta have a plan to make money. So if it’s like, hey, put a hundred grand in and maybe someday it’ll turn into something.
Scott: On the make money. So a lot of deals don’t happen there. And then finally, third is do deals. So enjoy life, make money, do deals. And as I tell people, we really have no reason to talk about the deal unless we’re going to get along and want to work together and we’re going to have a plan. And I don’t mean a, you know, paper napkin plan. I mean an actual real plan on how we’re going to make money and then we can talk about doing the deal. So that’s the basic structure.
Chris: I love it. So I remember reaching out to you and you said, let’s see if working with you. Will, will I enjoy life? Yeah, I’ll check that box. Are we going to do some deals together? Yeah, I’ll check that box. But, uh, if you’re not going to pay me, then I’m not gonna make any money. And so you’ve got to pay me to work together. And I thought that was hilarious and of course ended up working with you. So thank you for that. That lesson has been ingrained in me. Okay. So let’s get into the meat of the conversation. So you wrote a book called the 40 hour work year, which most people can’t even fathom. So can you break it down for us? What are the 40 hours spread across a year and how is it even possible to focus on a business that you own for that little amount of time?
Scott: Right. So the, and I always preface this with people as you know, it took – the company I had for 10 years, we were in business six years before I started living the 40 hour work year. So it didn’t happen overnight. There is no silver bullet, I’m just saying it can be done now. We didn’t start really looking at transitioning out of our business, which is the first step to live in the 40 hour work year until about 18 months before we put the plan in place. So even though we’d been in business six years, we didn’t really start putting this, what I call transition plan in place until about 18 months before. So for four years, from 2004 to 2007, we sold at the end of 2007, I lived what I call the 40 hour work year. In reality, it was probably less than that, but as I told you, 40hourworkyear.com was available.
Scott: So there you go. The domain name, it all fit. So the 40-hour work in breaks down like this, uh, about an hour and a half a month on the phone. And, for people who had read the book, you know, we had 42, we were in 42 states with 23 different entities spread across those states. So this was a big operation. It wasn’t like I just had one company to worry about in one state or city. So I would get on the call, I lived in Las Vegas, my business, uh, was operated out of Michigan. I lived in Vegas 18 hours a year, which was an hour and a half a month going over our key metrics, KPIs, talking about the basic issues, you know, real strategy type stuff from a people standpoint, lawsuits, things like that. And then that call would end usually in an hour, an hour and a half. But call it 90 minutes. We scheduled 90 minutes.
Scott: Uh, then what we did is every year, and this was for two full days, every year we would meet, uh, the whole team, the executive team of six people, my business partner and myself and create our operating strategic plan for the coming year. So top five priorities, content, going over budgets, creating our forecasts, and doing what I used to call white paper pitches on new services or programs that we wanted to offer in the coming year. And then once a year I’d fly back to Michigan. I’d fly back around June when the weather was nice but not too hot and I spent half a day updating our top five, meeting the new people we hired since the year before when I was there, uh, meet with my CPA, have lunch with my business partner and fly back home.
Chris: Wow. So with 18 months, do you think anyone could follow that plan, or do you think it’s industry-specific or you are in a particular situation that lets you do that?
Scott: So I’ll answer it like an attorney, you know, it depends
Scott: So there’s a lot of variables. I have met people who if they in their mind mindset really wanted to do this, they already had their company to a point where they could do it in 18 months. Then again, I say this because I did it, so I know it’s doable in 18 months. I’ve had clients that have done in 18 months. Most companies I meet though that have read the book and ask me this. I ask them first point, okay, is your sales taken care of meaning? Are you the lone salesperson or do you have a sales director of sales manager who oversees your sales team? If they say yes to that, I’m like, all right, do you have a right-hand man or woman who can run the operation? If you’re gone for three months or more? And when I say gone for three months or more, I mean gone like they can keep the ship running, maybe not growing it for a while, but they can keep it running, nothing. The wheels don’t fall off three months or more. Then I say, okay. They say yes to those two things. Do you have an executive team of four to six key people overseeing the rest of the company that report to your COO who would be that right-hand person and if they already have all of that in place, you absolutely can do this in 18 years.
Chris: Got It. So you also said something important, which is that you moved away from the business. The business was in Michigan, you went to Las Vegas. I don’t know how typical that is for other entrepreneurs, but I had the same thing happen in my story, which is I had a business in Boston and I moved to Scottsdale, Arizona. How important is getting away from the office or, or have you seen other companies do that?
Scott: I think, I think that and a great point. I think that’s maybe the most misunderstood or misinformed person out there is that I believe you need to be away from the location. Just like I like to do strategic retreats out of offices. In fact, we never had a strategic retreat within 300 miles of the office and the reason was to, nobody could drive back. I mean that’s the joke, but that was why we did it that far away. But when remove yourself from the office. So I, we bought a building after I’d moved for the business. I didn’t even have an office in that building. So the message was clear to the team, this is your company, run it, be responsible, be accountable. I’m there if you really need me, which is once a month, but I’m not going to come in and you know, do the seagull management type stuff or just hover over people. I’m going to let you do what your, you were hired to do. You’re great talented people go for it.
Chris: So the end result sounds amazing of course. But for most business owners that are probably listening to this, or most managers or teams, they’re in the phase where they’re still trying to build and figure things out. So talk us through your initial stages. How did you get from doing all of the work to finally handing things off?
Scott: Yeah, so I’ll shrink it down from, from what’s in the book. Basically, my wife told me she was tired of living in the cold and we’re living in Michigan. She didn’t care where he moved, just somewhere sunny. And of course, uh, you know me pretty well. I’m a very, a strong advocate for pay as little taxes as possible. So there were several states I could choose to move or move to. And so it ended up being Nevada. So the empathies uh, for doing this was moving somewhere sunny, getting out of the cold climate and getting out of the tax structure. So that’s how it started. I asked my business partner if she wanted to buy me out, she said, no. I said, well, do you want to sell the company? She said, no. I said, well, let’s figure out a plan where you and I can both remove ourselves from the business and then transition ourselves and our roles to other people in the company.
Scott: Because the last thing I’m going to do is go move somewhere sunny and nice and have to fly back to Michigan every week. So that was the real plan of it was an it, you know, it didn’t happen overnight. It took about four to six months after I moved. We got everything transitioned over, but we spent a year in advance before I’m approved setting up what we called the transition plan, which was for my business partner, Karen, and myself to transition completely out of our roles in the company. I was CEO, she was president and we moved to founder, uh, titles in the company and we promoted from within. A guy had been with us for six years to CEO and president.
Chris: So was there any resentment with your employees or the person that you promoted that they felt they were doing all the work but they didn’t have the ownership stake? Or how did you navigate that with you being so removed from the day today?
Scott: Well, and again, this is a mindset that I hear a lot and I mean, I gotta do is go look at all the public companies out there. Those founders are, if they are there, they’re having nothing to do with running the business at all, or they’re, you know, retired with millions or billions of dollars. So if you want to, I always say this, you know, you want to think small, then that’s what you’re going to be. So my goal was to find ways and find people that would appreciate and embrace this and be challenged by it versus just being told. And again, entrepreneurs are very, you know, egotistical, not always in a bad way, but they think that their employees really need them to be on them and really guide them and all that. And I’m not saying in the early stages, I didn’t do a lot of that, but when you get your business to a certain critical mass, and that’s where you’re asking earlier, every company is different from that standpoint. And you hire the right people, the last thing they want is their boss or owner coming in and going, yeah, that’s cool, but let me show you how you should have done it. I mean, good people don’t like them. They want, you want to be free to be creative, be challenged and do the things you hired them to do. That’s my experience.
Chris: So in the book you talked about this, this three-step process, doing coaching, and getting out of the way. So after you’ve finally let go of the doing, the micromanaging, how do you transition into coaching and do it in a consistent fashion? Did you have a meeting rhythm or a schedule of check-ins and how, how did you consistently mentor people as they developed?
Scott: Well, great question. And uh, it’s been interesting because I have a client up in Vancouver, BC and he came to this realization about six months ago that when he really needed to do was start being a coach to his employees. Now I’ve worked with them for a couple of years, so he was still pretty early on. But really Chris is this simple. I stopped talking 70% of the time and I started listening 70% of the time. It really is that simple. A lot of people say to me, Ah, Scott, you know, come in and coach our company and that’s fine. We sit down for the first meeting and they do 70 80% of the talking. So that’s another mindset that’s very difficult for type A, you know, high d entrepreneurs to listen. I mean, I, you know, my wife would say I’m still nowhere near 70% but you know, I think in my business world I can get too close to 70% and so when I started coaching, I sit down and talk to my employees and say, look, where are the areas you think you’re strongest?
Scott: How can we build on those strengths? Let’s create, I mean, there’s a lot of these out now, but I mean, you know, I sold, I was doing this about 15 years ago. I sold 11 years ago. A lot of what we were doing. I’m not saying I came up with it, I just read a lot of books and listened to people smarter than me was let the employee put together their own inter internal or what I call intrapreneurial business plan, if you will, for their position, their role or their department in the company. And then I coached them along the way versus doing it all. I was now coaching them on how to do it.
Chris: Got It. And so did you, through that process, did you do formalized reviews, annual reviews, quarterly reviews, or how did that fit into your, your process?
Scott: You know, the great, the great thing with us was because we were a PEO, professional employer organization, as we had a lot of these tools on hand because we supplied them to our clients, obviously. So we did quarterly reviews. Uh, semi-annual was the, was the deep dive and then the annual was the only time they could get a performance increase in pay. But we had a very robust bonus and spiff programs all throughout the year. Uh, because I think the main problem with a lot of companies, maybe not as much now, but back in back when I had mine was, you know, they wait until the end of the year and do a Christmas bonus or an annual bonus. And that’s, that’s just you’re waiting too long to reward people. You want to reward them as they’re doing what you want them or what they should be doing, versus just like, “Hey, remember that thing you did last March?”
Scott: Well, here’s your check nine months later. So the review process was quarterly, but the bonus and reward program in some cases was weekly. Uh, our payroll department had weekly spiffs, uh, based on Po payroll efficiency and productivity. So there, there were people that were getting two, $300 a week, uh, you know, little spiff cause of how they with the client and those people were making under 30 grand a year at the time. So it’s a pretty nice little, you know, bonus to be paid for, you know, basically inspecting what you expect, uh, with your, with your team.
Chris: That’s such a great point. So I want to call that out for everyone that’s listening because the frequency of the feedback you give and the frequency of the incentives that you give cannot be too closely, uh, at, you know, two closely attached to the performance and doing it more frequently and doing it more often gives you the opportunity to coach and collect feedback and course correct. Whereas a lot of companies will just wait for, uh, uh, once a year sit down and, uh, and then it’s like a cruise ship that’s really hard to move. We do the same thing here, so that’s, that’s great advice. Okay. So another thing in the book that you talk about that I’ve taken to heart is the idea of the decision matrix. So I’ve heard this called some other things and depending on what philosophy you subscribe to, but talk us through the general idea of what is a decision matrix and how can someone start to create one.
Scott: Right. So in the very basic form, it is a list of typically I’ve seen as low as 40 and as high as 80 line items or decisions that need to be made in the business on typically weekly, monthly, quarterly, annually, annual basis. You may have a few daily things in there, but what we typically did as we moved those daily things to the department level, not what we call the corporate level. So these line items are on the left and on the right if you can picture a grid, you have columns with the CEO or owner, COO, CFO, any other manager heads, department heads, is usually what we had. So five to six columns on the right. And then each of those boxes with that line item, there is an x and we use red on purpose. If you’re, my decision matrix is red.
Scott: So we want to be able to realize, stop, do not pass, go this excess here for a reason. Go make sure it’s signed off on. And the SOP, the standard operating procedure that is behind that line item is being followed. So if you had an X in the box and sometimes there were as many as three people, each person played a role in that system or that SOP in completing that line item. So when Karen and I started, we had over 20 boxes checked of the 48 and, and within, you know, it was probably about a year and a year and a half, we were down to seven boxes. And that’s how we really transitioned out of our roles in the company. So I use the example of, you know, signing checks, right? I mean I, I’ve gone into work with companies that are, are $50 million companies and the owner, the owner is still signing the checks. I mean, and that’s a trust issue plus a lot of other things. But you know, that’s an example of something on that line item. That was one of the happiest days of my life, Chris, when I was told everything’s set up. Now we’ve got the bank set up, facsimiles, the way the checks are coming in, you no longer have to sign checks. And that was very, very celebratory day for me.
Chris: So for anyone out there listening to this, you know, I don’t want this to come off as too complex because it really is a simple process to put into place at your business. You start with a spreadsheet, you list all the decisions or responsibilities in the first column as, as all the rows. And then you have columns for each of the department heads are the people in charge and you just put xs on who does what. It is eye-opening to see when one person has such a bulk of the decisions or responsibilities. What we used to do is we would use a function in Excel or Google sheets to show the percentage of all the x’s, what’s the percentage of x’s in every column. And you know, I’ve worked with other entrepreneurs that literally have 90 plus percent of the x’s still on their plate. And when they see that it’s, it’s at least a measurement that you can work from. It’s a starting place. So this is some of the best advice I think you’ve given to me. And I think to everyone else is just take the time to map, map out the decisions in your business. And at least you’ll have a snapshot of where things are today.
Scott: Yeah. And when I have you right on, when I do my talk, whether it’s at a big group or a small, you know, EO forum workshop or something, I tell people, look, if you do nothing else, nothing else from what we talked about today, go back and build your decision Matrix, put it in place and be patient with it. I mean I’ve got story after story I could tell you if of good and bad a how the decision matrix either had people throw in the towel or got them retired living on, uh, you know, big Acre ranch somewhere and not being in their office at all. So I mean, you’ve got to have the mindset as the entrepreneur that we’re going to systematize this. And to me, the systematization begins with the decision matrix. I believe.
Chris: So if the decision matrix is the table of contents, then the book is, the Sop is right. So you said, you said every X has a SOP behind it. So, so for anyone that doesn’t know, uh, what our sop is and, and uh, what was your process of creating them?
Scott: Well, as I’ve shared with you, Chris, that’s why I promote you whenever I can. Uh, we didn’t have anything like Trainual back in my day, I mean this is old school, what I call Henry Ford time-motion study. We had each of our department heads collect and the sounds, and it was onerous. I put in the book as the most onerous thing you’ve ever done. Now collect 15-minute intervals, recording what each person was doing on a daily basis for two weeks for each department. We then took all those and each executive team member sat down with the department head and went over those and they highlighted and sifted through and pulled the best practices, which were typical, you know, the 80/20 rule. Typically about 20% were best practices.
Scott: The rest, we’re just wasting time. We then did it again and again and again and it took us about six months, six months of this back and forth before we had collected enough data that we can now finish building out our SOPs, which then took us about three months to totally document and put on our intranet. That’s when we had back then there was no cloud and all this great stuff you guys have now, so it was either, you know, word document, Excel document on the intranet and the real pain of this though was it was, you know, better than nothing and it really helped us grow quickly. But the real tough part of this was, which is why I love Trainual, is when you had to make a change in one department that then had a ripple effect across maybe two or three departments.
Scott: We had to have somebody to go in and manually change those, type them in. So they were updated because there was no system at the time. If there was, I wasn’t aware about them and this would have been 2001 2002. There was no way, at least within our budget, we were willing to pay for it, to put that together and have it all universally available to everybody in the company. And also remember, you know, we were in 42 different states too. So there was this whole other part of is everybody fall playing from the same playbook, right? You go, well that doesn’t work in Virginia. Well, that doesn’t work in Oregon or you can’t do that in California. So we even had specified parts of the Trainual of our systems that were specific to those states.
Chris: Got It. Okay. So it really was for you a crowdsourced kinda thing where you relied on your department heads to pull, you know, the processes out of their heads and get them on paper and then make sure that everyone was following the best practice. So I think a lot of people can be daunted by, by this task of starting this and it’s something that’s never urgent. So how do you be disciplined about actually documenting processes when on a day today? It’s not making you money.
Scott: Yeah. So that’s another thing I hear a lot about. It’s like, okay, uh, this is great, but it’s a cost center. It’s not going to make us any money. And typically what I would do in that situation, if I’m, if I’m talking to a client, I’d say, “All right, bring me into one of your departments that has the least documentation of any department.” Like they’re struggling or they’ve never spent any time on it. And within about a half an hour of talking to whoever’s in head, the head of that department, I can pretty quickly line up, probably no kidding, 10 to 15,000 a week is being wasted by inefficiencies. And these are hard dollar-type numbers. And this is coming from their own employees telling me this while they’re sitting here not believing.
Scott: Yeah. So that’s what I always do. I always, I always see that people put it back on your own business. I mean, the money’s found in multipliers. If you do this,
Chris: Yeah, I look at it, you know, it’s, it’s an investment. There are no expenses in business. If you’re, if you’re investing in something for a reason because you have an expectation and you can inspect that expectation, right, then you’re getting a return from your investment. So I think this is just one way that in a very important way for businesses to, to make an investment in improving the company, increasing the value of the company, increasing the efficiency.
Scott: I know I’m preaching to the choir here, but another, another big reason for us doing this as you know, as you know, we, we always planned at some point to sell the business and Karen and I both knew that the value of the company, I know you’re going to want me to talk about this a little later is inversely proportionate to how involved the owners have to be in the business. And for Karen and I to totally transition out of the business, we had to have these systems along the decision matrix. In a program and a system that everybody in the company could follow. And, and it sounds very, uh, I’ve had people says to me as well, well, it’s Kinda robotic, like you’re making people robots and very task-oriented and I am just the opposite. They’re now able to spend their time, they were spending doing menial tasks, robotic tasks because they’re systematized and now they’re able to go out and be more challenged and be more creative and spend more time with the customer and with their employees, which is what you want them to do, in my experience.
Chris: Absolutely. So I know this would be easier to see in your live presentation and I’ve seen your keynote a few times, but maybe a great place, to end here would be the idea of the ownership paradox. You just touched on it really quick with valuation there, but, but why don’t you walk us through the idea of how to increase valuation.
Scott: Yeah, and I’ve done this without PowerPoint or video so people can play along if they want. So if you draw an arrow on a piece of paper from the upper left-hand corner to the bottom right-hand corner of the page and you draw an intersecting arrow from the bottom left-hand corner to the upper right-hand corner of the page and label them following this way. So on the upper end of the arrow that went from the left top to the bottom, right. Okay? So that’s the owner in the business, 100% so you’re in the business a hundred percent. You’re doing what I call making the donuts every day. You’ve got to be there. You own a job, you don’t own a business. The bottom right of that arrow is owner in the business, 0% so you basically did what I did. You move away or you’re not at the office at all you’re living in the 40 hour work year.
Scott: Now I want to be clear though, this is in the business, okay? Not on the business. You may still have a roles on the business, but quite honestly that’s what most entrepreneurs should do is their business begins to take off. You can, you’re not in the business at all. You don’t have direct reports, you don’t have to be there to make the engine run. The other error that intersects at the bottom left-hand corner is your, is your company. And on the slides, I put it in red, it’s zero or worse. I mean I have clients who if they had to pay off the debt to the bank. They would be worth nothing. They would be in the hole. So that’s zero. The upper right end of that arrow all the way to the top. This is the maximum value of your company. So whatever you think that maximum value can be, you can be $1 million, it can be $100 million, it doesn’t matter.
Scott: Now here’s where the entrepreneur has to really be really honest, and I’ve done this in front of groups with other executives there who could kind of call them out and stuff. You need to circle on that downward arrow coming from the left top to the bottom right. How much are you in the business? So if you’re in the business a hundred, you’re at the top. If you’re in the business 50, you’re in the middle. And my experience at this point, when I did this exercise, I was about 75% in the business. So I drew myself to the left of that center intersection halfway. Now draw the intersecting line to the other arrow and circle that. And I tell people this is the fastest, most accurate valuation you’ll ever have in your company.
Chris: I love it. And so it seems simple, but the less involved you are and the day to day operations of running the company, the more likely someone else will come along and pay top dollar to be able to take over that company because they don’t need you. But if you are required in the business and a crucial component is being removed from the business, then of course the valuation is going to be less. So it’s simple but it’s brilliant. So everyone that’s running a company and has aspirations of selling should go through this exercise and should read Scott’s book. So Scott, tell us where can people find out more about you and about The 40 Hour Work YEAR?
Scott: Oh, thanks, Chris. Yeah, well you can go do a 40hourworkyear.com and check me out there where he can go to my coaching website, which is growthconnect.com. All my programs are on there and different options I offer, ways you get in touch with me, that sort of thing. It’s all on there. Check it out.
Chris: All right. And for more of Scott’s story, you can check him out on our site at trainual.com/Scott. You’ll learn all about The 40 Hour Work YEAR and other ways to get in touch with Scott. So Scott Fritz, thank you so much for being here. We really appreciate it.
Scott: Thanks a lot, Chris. Always a pleasure.