The other day some friends of mine sold their business and this really got me thinking about the Acquisitions I’ve participated in in the past and the role automation plays in generating value.
One of the biggest red flags I see when evaluating and running a business is a highly loyal and productive staff that goes above and beyond for the company. This is a red flag because when a company is bought, leadership changes, culture changes, and sometimes change alone is enough to inspire people to leave, even if it’s change for the better. Change makes people reconsider life decisions, go back to school, switch industries. Now for those of us that have built companies from the ground up, I think we generally know that scrappy bunches of unicorns going above and beyond is how most successful small businesses start. But as much as it makes my son mad every time I say it, “The Jedi story isn’t the interesting one.” Sure, can a single Jedi turn the tide of battle and defeat a death star? Yes, but as your Empire grows are you really going to be able to find Jedi for every area of your business? No, the real story is how the Empire turned a bunch a clones and unmotivated youth into a force powerful enough to take over the entire galaxy. And how did they do it? Through a form of automation called “Process”.
When do you buy a business? As I mentioned most small businesses start as a bunch of highly talented and specialized people going above and beyond to bring something special to the market. Many of these key people with key skills are won over to a risky start up through promises of ownership and a pay off when it sells. Transitioning from this highly talented brute force model to an automated machine is a transition that few businesses perform well. Many people will judge whether a business should be bought based on it’s market penetration, revenue and growth stability. It’s often common to want to buy a business when it’s revenue and growth is high and it’s profitability is low, as this allows you to drive down the price and then as a more mature business bring efficiency and scale to deliver profit. The point of this article is to encourage you as the buyer to dig past the financials and to look deeply at the people and process, and also to help sellers see how to use Automation to increase the valuation of their companies, and how adding Process may make them even reconsider selling.
Every leader should always be trying to work themselves out of a job. But this goes further than just grooming your replacement, the next charismatic unicorn, which is a difficult and often fruitless task that actually leads many owners to sell. No, the biggest part of working yourself out of a job means establishing processes and culture that survive without you, and without someone else behaving like you. Even if your goal is to pass the business on to family, or simply spend more time with family, or the beach, or playing golf, removing the business’s reliance on you and your key team is the first step. So how do you do that?
As a seller looking to grow value, or a buyer looking to retain newly purchased value, first find your Jedi. These are your celebrated staff members and likely even yourself. Many of them have specialized knowledge. Many are great “doers” who take matters into their own hands and pull you across the finish line every time. Although the goal by the end of this is to not be dependent on these people for the day to day, they are the most valuable engines of change and growth your company has. Step two is to support your Jedi. They need to know that you have a plan for them. They need to know that they are critical to the business as a whole, even if you are taking away the business’s dependency on them. This will be painful and require finesse, deadlines will be missed, customers will be angered as they transition. Don’t let them jump back in to their brute force methods. These kinds of super stars will embrace improving the business if you recruit them to grow the business and make their place secure through new roles like “Continuous Improvement”, “Strategy”, “Business Development” and “Learning and Development”. That will help them pass on their knowledge and let go of crippling responsibilities. Task those with specialized knowledge with creating the syllabus with which to train others. Not everyone is a great trainer, especially people for which things come easily. They can often be quickly frustrated by how long it takes others to process what they get as second nature, so don’t put them in a training role unless they have a skill for it. Start them immediately on documenting what they know that no one else does.
If your Jedi are simply faster and more productive than everyone else, check for cut corners and skipped steps. If those exist but the quality of production is still good those may be “unnecessary steps” or there may be other unseen faster steps you need to discover and document that your Jedi are performing. If there are none, then “gamifying” the workplace with tangible metrics and rewards can lead to others seeking to win too. Be up front and alternate the criteria for winning (IE: lowest reworks versus most productive), to make sure your super star isn’t always the only winner. This is important, a “doer” super star is a dangerous thing for a business to have. They can often lower productivity around them, because everyone knows they will step in and come to the rescue. People often skip learning new skills because someone else “has it covered”, but super stars are still just people. People who get sick, people who have life changes, and people that want to grow. One of my old Colleagues is the fastest in her department. She often produces twice as much work as those around her. She has a strong desire to advance her career, but the business fears she will not be the same super star in a new role. But what do you think will happen if the business gives her no path for advancement?
Coming back to acquisitions, what I look for in an acquisition is “if the business lost it’s charismatic leadership does it still have value?” “Can I hire and train people to replace the super stars if they leave?” “Do the sellers company’s Culture and Processes match or compliment the buyer’s so there is no exodus?” If not, then you are doing nothing but an Asset buy, and businesses full of super stars often have people that can overcome deficient Assets so I would be even more cautious about an Asset buy.
I’m sure plenty of people are saying… Ok, ok, when is he going to get to Automation. This IS Automation. Having the documentation and training in place to hire employees and have them be top tier producers with a minimal amount of experience and specialized knowledge is Automation. Even if you did retain the superstars from the company you bought, is there methodology scale-able and sustainable? Especially as they transition from a smaller company to a larger company.
My friend’s business that sold recently had a good product at the core of it, but a big part of what made their product so valuable in the market was the incredible customer service and depth of knowledge the ownership possessed. In their particular industry I often see their segment of product underutilized or even becoming something bought and never implemented due to complexity. So how, if the ownership in the company decided to leave, does the company maintain it’s value? By productizing one of their core strengths. When you productize your complete value proposition and assigning defined roles and responsibilities to everything you do that adds value, you can structurally maintain the actions that the company’s founders may have just “done” that ends up lost in so many acquisitions. In this particular case we would call those “Professional Services”, to cover implementation of the product and harness one of the company’s greatest unadvertised strengths.
Moving away from the people and the process are two other forms of Acquisitions. As a buyer in an Asset buy don’t get too enamored with how the equipment performed for the company you’re buying. Pay close attention to formats, connectivity, speeds, parts, service and repair. Make sure that the equipment aligns with your equipment and you won’t need to double stock inventories, or re-invent your workflow or MIS systems to submit work. And the other often overlooked place for Automation in Acquisitions is when you buy a Customer base. Make sure you understand the Customer Experience, how they place and receive orders. Beyond just the products, turn times and costs they expect. Walk through the customer experience from order to delivery multiple times before buying a customer list. They used the company you’re buying for many reasons and until you understand those reasons you can’t expect to keep those customers.
Acquisitions can make Millionaires and can accelerate growth, but when buying businesses without automation, they also often make a handful of people or assets that you end up paying millions for. I dedicate this article to the couple million dollar men I’ve known through past acquisitions that lacked this due diligence. You know who you are, and in the end, even after disposing of junk assets, and losing mismatched customers, the value these few individuals brought to the company I’ll say was worth every penny.