[0:10] Everyone this is the ESOP guy so happy you could join us today on this journey to an ESOP. [0:17] Podcast is really been created as we go through a lot of different topics to help folks understand better when an employee stock ownership plan is how it's used. And really work themselves through some of the things that they need to understand better before they get into hiring all these people and trying to pull the trigger on their own ESOP. So I wanted to start off today it's just been you know people say to me like how do you have you know all these different podcasts were in season 3. And we've been doing this now this is going on our third season that are in our third year of doing this and I think one of the things that just react the reality of Aesop's has there's always I think something to talk about that's important. [1:01] Now some of the some of the topics might overlap but there's always something that's got kind of comes to the surface and so this podcast is really no different than anything else that I've done because it's really been generated out of just dealing with. A lot of different folks in different stages of their journey to an ESOP and I really this week I had like two meetings with companies. [1:26] That are not yet you know obviously they're not Aesop's but they're contemplating the idea of doing an ESOP and these are like selling shareholders are companies that are thinking. Around how does an ESOP really help them specifically with their Exit Plan, and we don't talk of ton about the exit planning and enough but the idea behind it is is they are, wanting to understand has the ESOP how does he stop really affect the exit plan because frankly they're just tired and I totally understand what they're saying and so we're going to we're going to dedicate this, could use a little bit of help so this okay so who is this what I mean all right so I know that everybody's in different age groups but if you don't recognize that Bruce Springsteen song then. [2:55] I'm sorry but that's Bruce Springsteen and he is the boss and so this is going to be entitled. [3:02] The who's the boss baby of my ESOP company, and anyway I just thought that would be fun what I mean by that is is we think about what we're going to think about and contemplate in this podcast is how does the boss concept the CEO specifically get transitioned and. [3:23] What I what I what I kind of have gleaned from some of these meetings is it this is really the like one of the most difficult transitions in a company and you and it makes sense though because. [3:35] The the idea behind. [3:39] The actual transition of this position is that it's it's the intangibles it's not just the functional responsibilities it's the intangibles that it's the it's the culture it's the leadership it's the Visionary like where the company is going and how it's all being put together. [3:58] And so I want to kind of point that out that this is this is a really important. Topic in as we get into it I think the biggest thing is that no matter if you guys no matter if you do an ESOP or you sell to a third party or you're going to do a management buyout the transition of the CEO position is is really critical and you can't get started soon enough to be honest with you. And I don't mean started like in the sense that you have to accelerate. Putting somebody in a position where they're not qualified I mean start phasing people into that the concept of what that might look like having some discussions about who them that person might be recruiting as you recruit people looking at who that might who that might be so there's a lot of aspects to it but that's what we're going to get into some detail on today as we go into this topic. [4:48] So let me just start off with this as we as we think about what we just talked about and just making sure we connect the dots correctly. Springsteen who is really famous in one of one of the greatest. [5:05] Um rock and roll artists of all time okay so he acquired the name the boss, during a period where he was the reason he got the name was because he took on the task of collecting his bands nightly pay and distributing it among his bandmates he also reportedly. I would also play a lot of Monopoly and so he basically just got that tagline or that nickname and so it's just kind of stuck so when we think about the boss. We think about obviously the boss of the business of course and I think it was just a nice way to connect what Bruce Springsteen is done and contribution of music too, to the world so get up in the evening and I ain't got nothing to say I come home in the morning I go to bed feeling the same way I ain't nothing but tired, man I'm just tired and bored with myself hey there baby. I could use a little help so what I love about this this lyric is and it really does Connect into conversations that I have with people when you talk to a CEO of a company. And if there were talking about Aesop's a lot of times they're just like hey man I am so tired of doing this job and and I'm going to tell you right now I totally relate to that because I had the same issue I you you do get worn out and in until you've done that job. [6:23] You can imagine the amount of every day. Day in and day out the grind of problems and issues and coming up with Solutions and and you know having a great leadership team of course helps but it's still. I think one of the most difficult positions if not the most difficult position of the entire organization or entire company. [6:50] So my hats off to all the CEO's that are out there that are listening to this and thinking you know what I'm tired and I could use a little help the cool thing about this song is it does portray the frustration that I think of course the songs more about like. You know love and stuff like that but it's it does portray this frustration of not getting anywhere with something and I think the CEO transition can feel like that sometimes because it's it is a really difficult process, and not only that as time goes on in edges towards your every year kind of starts to swing by and we have one thing after another happen, in our economy and then politics and then you know now with you know last several years have been the pandemic it just wears on you the external factors the internal factors of you know right now wage inflation and. Nobody's ever really happy with with their compensation or you know you've got one committee after another and or people circumventing processes or, people calling you to death trying to like by your company I mean there's just a million things that I think will just put you know just. [8:02] Eat at you all the time as a CEO and you don't have to kind of go far into that to know that this this is an issue and so as we as we think about it one of the things I wanted to start off with, is this idea that no matter what you decide to do in your in your business the ESOP isn't, the the turnkey solution for your CEO transition it's not like it's not like and that's why I want to save you a ton of time if you're thinking well I'm just going to do an ESOP and you know I'll suddenly have poof I'll have a CEO step show up at my door it's not going to work that way, in fact it planning a seat planning an ESOP one of the integral steps of planning an ESOP really is going into. The transition plan in showing the trustee in the valuation firm hey this is the qualified people that we are going to have take over these positions if we're planning an exit around a nice, and specifically this is the one that's going to be the focal point right because usually the selling shareholder. If you think about a closely held company and you got one single owner that persons usually the CEO or president. [9:14] Hey real quick one of the things I forgot to mention I'll jump back into the what we're doing is I have this repeated thing that happens to me when I talk to people about these Ops. And I wanted to I wanted to kind of do a couple things as standards standard shoutouts to people that I think are important, and it might be just redundant for you, that are listening but I can't believe how many people when we talk about esops don't understand that the the esops that are owned by us corporations. [9:46] Whatever percentage that is owned, are tax-exempt that means that they won't pay any income tax and that income tax will be used for the cash flow of the company to buy out the owners it'll be used to pay off Bank debt that that's used to finance the buyout of the owner so that's number one number two that I find is very common in these are just going to be standard things I'm going to plug into the podcast because I think it's just important. ESOP Tsar not expensive in comparison to normal m&a deals unless you're dealing with an investment banker and then they're probably going to be just as expensive, and most ESOP deals I'm going to tell you right now I don't think you need an ESOP or investment banker to do as your cell site advisor so those are going to be some standard things I think I'm just going to include, but back to the CEO transition I wanted to again zigzagging a little bit about what we're doing but I hopefully we could back on track with. With the CEO transition episode so. Kind of Segway back into what I was saying it is frustrating and it's difficult and it definitely needs to happen way before your boy before your exit if possible and if not possible, then one of the things you kind of have to plan for in your ESOP is that you're going to need to plan on on still playing that role until you phase that out correctly, the worst thing that can happen is you is you do an ESOP or. [11:12] An internal you could even do a management buyout and have this same issue and you don't have this like set up and then you have a disruption in the company because you're not as engaged, you know like you should have been now. Why would that happen well it'll happen because it could happen because you're you've just got some money from the bank on the financing and. Here you're kind of done and you so you just we have to finish the job of transitioning so it's a critical step in the process of your transition whether you do a third-party sale or an ESOP or a management buyout. [11:49] But it's integral to the steps that we go through the ESOP process so. CEO transition to have and I believe always will be challenging but really today's environment makes them even more so and some of the things I think that are challenging around this. Particular transition is first off it's tough market for talent I mean hard to find people if you're if you're like seeing your company like I am not finding the person. [12:16] Our personality or the attributes of what I really know to be true that we need in this company to lead, and we're going to go outside and look at the marketplace it's tough to find people to do that now the other side of it is it's tough to keep your people and so. Now as I think about this challenge internally I can't raise somebody up to the level of CEO if you're not going to stay with the company right and so. [12:42] A shout-out for Aesop's and one of the benefits of using this for your succession planning is that it does help to retain key people and we can retain them, in the first part of the doing setting up an ESOP and you can do it in tranches and maybe they they'll start getting some, he's upstairs there but you can also then M incent them with a stock appreciation rights program so there's some tools with esops that will actually help navigate. The succession plan specifically towards the CEO transition may be more effectively than without it so that's part of it, Second Challenge I find is it's just really hard to find the personality. In your in your organization and when you're searching for that type of person because you have developed. Culture in your company that really does Echo from who you are as a person and it's partly the way in you can just tell this when you meet with people and you can kind of as you meet with the CEO or you meet with their leadership team. Or you just walk into the company you can kind of get a sense for people's culture so culture so incredibly important, one of the reasons we want to stay and we want to do an ESOP is because we want to retain the very unique culture that is the. [13:59] Secret sauce it's the it's the way that that company functions it's the way that the company you know produces so much value for its customers and. The worst thing I can I can just tell you the worst thing that I look at and business in the community is like when people sell out to the private Equity people and it's all about money is. [14:19] You know the downside of that is that you just find cultures get just totally annihilated, the only thing the private Equity groups really care about and they'll say something different but at the end of the day there are Financial buyer. And they care about is making the most money they can on the multiple and so whatever it takes to make money they're going to do it and that's just going to wreck a really a good culture that's built around. Other values other than just making money so. That makes it difficult because what we want we don't want to disrupt the culture so what I what I also find in this one part of it is that. [14:57] As a CEO transitioning somebody in. You you're not going to find someone exactly like you either and I want I wouldn't expect that person to be exactly like you so one of the things I would say is. Is you want it you want somebody that will lead and be authentic and who they are but also will connect back to your culture, in a way that's not going to go negative on you if that makes sense to you so I when I transition my role as a managing partner I wasn't looking for somebody to do it the way I did it and I took over the role of managing partner in our firm. I remember just I'm just a different person and I got comfortable with not trying to be like the person that I was taking the rollover with or from, and it's the same thing for the new person here I was like like you know you do it your way and you are your person so you know and there's a lot of things that I implemented that are still going on culturally that are good and there's some of the things that to be honest with you, that person's done way better than I could because he's a different person so. So I think you Embrace having a similar culture when you do the transition finding people that really do hopefully fit and that's challenging. [16:03] It does that it in the third thing here is it takes time and it takes patience people in our positions that run companies. It's their personality indexes if you look at them are primarily very impatient people that's too bad right because, when you're impatient it's hard to do this transition so you have one of the things I'm going to as we get into the conversation a little deeper is you got to be countable to this goal to other people because because you're so impatient, your keep putting this in the back burner and so recognize that as a challenge, look yourself in the mirror and know that as we use Bruce Springsteen song like you'll just be Dancing in the Dark you'll be kind of frustrated with the whole process, if you don't get comfortable with doing this and being uncomfortable being you know this taking some time and energy. [16:58] Doesn't lead maybe necessarily to some of the financial goals of business has or whatever but it's a long-term thing that is going to help build value in the business. [17:07] And I think the fourth challenge is a segue from the third in that because it gets deferred. It becomes easier and habitual to defer this issue and not do the transition so. Um so like it or not as you listen to this you could probably turn me off if you don't like what I'm saying to you but it really is important. Understand these challenges be accountable and know that that more you're doing here the more value you're creating for yourself, in the transaction and so what as we as we leave those challenges I just wanted to kind of go into a statistic that I think's important when we think about, when we think about the options we have to, transitioning CEO so one option you have in a CEO transition as you go outside of your business and you find somebody you recruit them and you hire them and in some cases that's the only option because there's clearly not somebody suited to run the company. And let me pause there for a second to one of the things that I to I do think that happens is sometimes we do outgrow our businesses, our business is outgrow us right and what I mean by that is is sometimes you just got to say you know what this business one of the transition one of the reasons of my transition is that the business is needing a CEO that's equipped with more of something that I personally maybe business-wise don't have and I'm not going to get. [18:34] It's really fun and really valuable for you to recognize that sometimes you're better off having much much smarter people around you to do, what you think sometimes you're the only one that can do so that's just kind of a tangent but I do think, in those cases you kind of have to do an outside recruiting process but the statistics of that are. That when you do recruit from so many outside your 17 percent more likely they're going to leave within the three years within three years. As opposed to internal CEO or someone sourced inside it was approximately only 11.8 percent likely to leave now the key issue of, when you do transitions is is we don't want a, a three-year a one-year or two-year term on somebody that totally disrupts everything in motion so so you got to understand one of the goals of transitioning when you think about it is you want this thing to be permanent and permanent I mean you want it to last obviously more than five years because it'll be disruptive and difficult, re-establish another new leader and c.e.o. so it's it's a critical area and so you are more likely to have. [19:47] The disruption if you do go outside the company. So there are things that you can do I think to mitigate that in terms of how you establish who they are but it is statistically more likely that they are going to leave if they come out and that makes sense because. You know there's a lot of challenges of bringing so many into an organization from the outside I mean you know they haven't been there they don't have the, the Rapport or the respect of the reputation that takes you know sometimes 20 years to build that in an organization so it makes sense and that's why I think it's preferable when we when we pause with this way it's preferable to think I really do. I prefer to have so many internally to take over this type of situation. [20:30] So but it is like I said there's there's definitely reasons to to look on the outside. Now so we're going to go into the so I process that I kind of researched and just going to walk through the process of maybe doing a CEO transition and some some best practices in that I hopefully we'll find they'll you'll find those helpful and kind. Can move through that process with you know your team if you're not at started or you're in the middle of it maybe it'll be some added value or ideas that you might not have considered. [21:01] So in doing this we want to think about this for 25 years out if that's possible so to part of the best practices is to start the start the transition with that time line in mind. And the reason for that I think is just that you have a lot of parts and pieces to this and I think it's for smaller entities it's probably shorter for bigger entities is probably that and maybe long let you know probably not more than 5 years I'm guessing for larger entities smaller entities that just there's just less to have to transition or get to know so one of the things that we start with though in best practices for c.e.o. transitions is the idea of how does aboard. [21:44] Um actually get involved a board of directors in for companies that are going to Aesop's one of the things you should keep in mind is that you're at the end of the process you're going to end up having some type of board of directors if you sell a non-controlling interest. For your ESOP you're not going to have to have an independent board member but if you sell a controlling interest you're definitely going to have to have an independent board member and so-so. With this let's just say you're not an ESOP company yet of course. It probably makes sense to start the process of thinking more like a board of directors thinks and in this case what a board of directors really does is they look at. The. We'll talk about the composition of board in a second but they look at the this the need that we have as a business or an organization to have a transition for the CEO and they really would orchestrate an outline. What I would say is the succession plan. And then so somebody's going to pick that up as you know let's just keep it simple like let's say that's that's a rock for somebody to do on the board of directors. [22:50] To create a succession plan vet that out with the board and then really work through of course with the CEO involved on the board. The the timeline and the attributes and just play got a building I would say the written plan, to determine what are the what's the best approach now some of this is going to include evaluating internal candidates from a strengths and weaknesses standpoint and seeing how they fit into the possible consideration of that. And so the more that the board is involved in this is why I'm really pushing that that concept, the more I think you're going to have more accomplished in the process of doing the transition because the board is going to. [23:36] Hold the c.e.o. and others accountable, to make those things happen and it could be the interview process it could be the recruitment process of your HR people or your recruiting, Headhunters that you're hanging but somebody's going to be accountable and it's going to be a timeline thing and it's going to be created and bedded out so that it really does make sense. [24:01] So that's the first idea of really leveraging your your board of directors and if you don't have one then I would create some type of board to do this and not rely on this to be, just the day-to-day type of deal where you're like hey I got to get this done this year I think it'll just be far better. I also believe in independent people on this board in this type of thing as well so maybe even if it's a board of advisors that can give you an objective. Critique of what the plan is to make sure and that it's done well and I also think that it's very helpful to. Obviously have the CEO the current CEO involved in this process but not be the only person involved in so maybe even having a committee that is in charge of the CEO transition is helpful because I think again you're fighting some of those challenges that we had talked about in the beginning that potentially can get deferred based on the CEOs schedule and really not wanting to do it, and anyway so those are some things I think are going to be helpful so Step One is going really planning the transition and really thinking about the details so. I think this comes down to again working with the incoming and outgoing CEOs and. One of the ideas of this is creating a what we call a straw man. [25:25] Transition plan where everybody can just beat it up and say all right this is the way it looks offer lots of feedback. And then create that plan and then execute that plan as time goes on so so creating the plan is First Step vetting it out with the board is the second as you get into the planning side and then. And then obviously implementing the plan and then in the next step so so clearly then the next step is going to be documenting a communicating the plan so. The transition process and decisions should be put together memorialized communicated throughout the organization it it's an iterative process and it's going to take some time and steps to get it done. During the transitions leaders and a level or two below Co often feel a lot of anxiety so part of it is to, make sure that you communicate through that anxiety and what what can really go wrong here is kind of obvious as we've just, you know as you unpack that is you could upset the apple cart with really good people that are really not going to be CEO. [26:32] So I think it's going to require a lot of communication and in terms of what we're doing what what's happening why we're doing it. [26:41] Being as transparent as possible with key people so you so. Retaining those key people obviously is the goal and if they're not going to be considered for it now if they are going to be considered for it now obviously that's going to create a bit of anxiety as well and so. [27:00] It's going to have to be really well thought out as far as how those interviews go and that's why we go back to the top of what we were talking about, the board of directors in the board or the board of advisors really does need to vet those resumes of the individuals inside the company first so that there's not a. [27:21] A process of interviewing and then people really get disappointed and leave the company. [27:28] So a clear communication of also of the roles and responsibilities of what those what this position really is about even though it's. [27:39] Kind of obvious sometimes with the CEOs position is all about I would say writing down. Those specifics are going to be really important to make sure. That everybody understands that you know the pieces of responsibilities that are being transitioned and. Sometimes that assuming gets us all in trouble when we do too much. [28:03] The next day of The Next Step here really is to make sure that the knowledge and in the culture are going to be intact so as we go through this process the outgoing CEO is going to really want to share, his or her knowledge with the as we do bring in somebody new to the new CEO about, the organization's relationships that could be external relationships and internal relationships and, the how the businesses culture really works and just being kind of bringing them on board with some of these high-level things the, this is critical when you're looking at somebody from the outside of course and then just assuming that they got this so so those are going to be important, a transition plan must include developing a deep understanding the company's goals strategy and formal and informal elements of culture so obviously people picking up, the Strategic plan and you know it's part of the interview process or as part of the ongoing process once they do get hired is going to be important and the, you know one of the interview processes would really be hey what what if you look at the Strategic plan and the goals and objectives of the company for the next fiscal period, what would be your approach to implementing that plan I mean these are these would be good things to to air out to vet out the candidates but now assuming you have somebody on board. [29:28] Their job is to execute that plan and the biggest thing is that. And I think one of the hardest things is is when when a CEO already has. A solid reputation and respect with their key people we have to transition that to a new CEO and and really building that it takes time and energy and it takes the right personality and so. [29:55] Who knows in the organization what skill sets will come into play sometimes the CEO the new Co just has to be, somebody that has really strong communication abilities that can either be very persuasive or can be very organized or can be. You know I guess from a empathy level empathizing and compassionate but connecting the emotional part of the team with what they're doing is really going to be important and again that's something that you'd be looking for in terms of your skill set. Who fits well with your existing key people when you get into it so, Next Step would be really understanding what is it that the companies really goals and objectives are and concerns so as we think about the new CEO how should they engage the companies, broader leadership group or key stakeholders and understand their perspective so if the. If the company has other shareholders or other people that are invested and have a vested interest in what's happening they need to really understand what those are and then play those are not play those put those into, action within the implementation plan of their first year and making sure they've considered all of those. [31:10] Obviously companies have external relationships at this is again this is part of that process of building relationships with everybody that's that's, key to the success of the CEO so that they can make sure now like in a small organization some of that has to do with how they communicate with the bank and the bonding company, some of it has to do with how do they communicate with the customers and who those key customers are key suppliers and so. Um everybody has every company has kind of similarly that CEO has a sometimes a difficult time getting out of. Some key relationships because hey you know I've always called Bob because Bob is the CEO and I like to talk to the boss you know so how do you how do you get Bob freed up. From having to be the one that takes those phone calls and so that's going to take time and then again we have when we go back to the top of our, goals and objectives when we were thinking about this we're looking at a four to five-year time Horizon right and for smaller organizations maybe that's less time, so it's a matter of taking the time that you need and this does this kind of obviously they takes time one of the one of the keys of transitioning that though is that if the CEO that's transitioning out. [32:28] Becomes an issue or a problem here's how they can become an issue of problem if they're really saying I want you. [32:37] You know I wanted you know Bob I want to talk to Bob one talk about and Bob keeps taking the phone call. [32:42] Bob should basically say you know what I appreciate your calling what I want to do is have let's just say Johnny is the new CEO I want to have Johnny on the phone with us so we can kind of continue to transition what we're doing but I have no problem being you know, in the call or on the in the background and then ultimately you know I'm basically handing you know this this relationship off to Johnny and Johnny is going to be the one but, you know over time I'll be I'll be around for the first years just to create and establish some comfort and I think that's a that's a pretty logical and commonsensical approach, um everybody getting comfortable with a new purse of key person a new person and so. With if Bob is the key person and he's transitioning out and he won't let go of the reins there then that's going to be a clear issue that he's going to need to be accountable to the board on and that needs to be brought up in the process because it's. That's one way that you'll lose a good CEO that's coming in up the speed or trying to get up to speed and their responsibilities so. [33:47] As we go one of the one of the ongoing steps is just really assessing the transition and looking, where are we at so if we come back to the original part where we had created this written memorialized. Succession plan that was vetted by the board and then it has a timeline to it the board's going to want to assess that transition and say yes we're on track or no we're not on track and here are the issues. Those issues are going to need to be dealt with on an ongoing basis so my advice on this is at least quarterly. [34:22] The board or the committee or whoever is responsible for this needs to assess, where the the transition plan is and if it's if it's making process or progress towards the goal of completing it so clearly that's going to be, um again just super logical but to get us to continue to move through that's going to be really important. [34:42] And I think that the big thing I would like to leave with if we think about some of the things that just wrapping up this and I try to give you kind of like why this is so difficult and also connecting this back to the ESOP companies. That are companies that want to become ESOP companies. [34:59] I will tell somebody that if you're going to go ESOP and you haven't started the transition plan just plan on for 25 years you know and if it's less than that then great if not. It's always great to meet a company that where the owner doesn't even work at the office anymore and they're ready to transition to an ESOP and but that's not always the case so. You know but assess what we'll do is we'll assess as a advisor to the company on the ESOP we're going to assess. Early on that where that transition plan is of course not just for the CEO but for each key position and because that's going to be a direct risk to the trustee and and we want to know how that will play out and understand that if. We can show a strong transition plan then we're going to have a more successful negotiation so there's there's a lot of good reasons here to be thinking about this topic, and trying to move if we started January now and we're thinking about the year trying to move this up on your objectives this year in terms of how you get this done. [36:04] I didn't mention this but I will say this kind of towards the into I think there's probably phenomenal and I don't have any recommendations for you but I think there's probably phenomenal coaches business coaches out there that could be also a very helpful resource in this process I think that, people this that companies that do this or consulting firms that do this for a living are phenomenal at it I know of interviewed some people in this podcast maybe in season 1 I've had some recommendations for books if you go back and look at them and just. You know but just there's a million resources out there so it as much as I kind of went into this what the boarded internal board of directors I do think that's. Probably a more effective way to really do this but sometimes you just need to hire a consultant and hold you accountable and pay the money to them because they're worth it. Um Interview them and make sure that they're good and make sure you check the references to see if they're worth it but I wanted to throw that out there because I do think it's sometimes just you know easier and more effective to bring people from the outside in to help you be accountable to that there are other, aspects of this to that really Mary up well with some of the some of the new ways business models are being created so so for instance traction. [37:20] Has a organizational accountability chart that I think is very helpful for this I recommend that as a resource they also are helpful at splitting up the Visionary role and the integrator role if you're familiar with this if you're not pick up the traction book by Gino Wickham and check that out I think it's helpful two for most companies that are even like just coming up the ranks it's helpful to discern between the CEOs Visionary responsibilities versus the operational responsibilities in the that will actually impact the co transition very favorably because I think it puts people in the right seats, you know and doing the right things at there. Put together to do and really does I think affect and really impact positively a company as they go through that process. [38:13] So I hope this was helpful to you I know that transition is a difficult topic and it's not like one size fits all it's. I don't know if I used the word right but organic in messy and. But it's also it's really important and so I hopefully that gets you kind of thinking about it for you for you and your company. And as you go through the process of thinking about a nice. I strongly encourage you to consider all the different resources out there as well as this podcast and get as much information as you can ask a lot of questions, and Workhorse always here to help you cannot go to journey to an ESOP calm and always write up a chat if you want to chat about something so. So with that everybody I just wanted to kind of encourage you to enjoy 20 22 and keep on keeping on we'll see you next time on this journey to a nice.
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