Operating Systems That Enhance Transferable Value

Mon, 07/18/2016 - 05:00


In last week's article, we briefly interrupted our series about the role of Value Drivers in building transferable value to show you how advisors, no matter their expertise, can work with business owners on all nine Value Drivers. Today, we return to our description of Value Drivers, specifically, operating systems.

In the context of transferable value, operating systems are the established and documented standard business procedures that demonstrate to buyers that a business can maintain its profitability after the owner leaves it in the buyer’s hands.

State-of-the-art operating systems and the next-level management teams who install, strengthen, and update them are the two most important Value Drivers. Both are necessary to create transferable value. Additionally, great operating systems are essential in creating scalability, as Patrick O’Keefe, a partner at Excellere Partners (a private equity group with a focus on investing in emerging growth companies), explains.

While all of the Value Drivers are components of a "good" business, we look for companies that offer a compelling customer value proposition (what is unique about the company’s offerings relative to competitors and what makes customers repeatedly buy from that company) and a management team with a vision for the future of the business. We partner with these management teams to drive growth in the business by building upon the existing customer value proposition and implementing repeatable and standardized processes that enable a company to scale without significant additional investment or over-reliance on any one or group of individuals. 

The Value of Operating Systems

The theme of Michael Gerber’s best-selling business book for entrepreneurs, The E-Myth Revisited, is, “Let systems run the business and people run the systems. People come and go but the systems remain constant." This advice is as true for smaller businesses as it is for larger enterprises—the focus of private equity firms.

Having great processes means customers, vendors, and employees enjoy the same experience each time they interact with a company. It also means that the data surrounding each interaction can be measured, interpreted, and mined. Using those data, next-level management teams continually modify and improve those experiences.

If a company is growing rapidly, as it likely must if it is to attain the cash flow and value most owners need to exit on their terms, the owner’s own bandwidth is a limit beyond which the business cannot grow. Unless, of course, owners free their businesses from over-reliance on them by creating superior, properly managed systems. “Let [your] systems run the business and [your management team manage] the people who run the systems.”

Evaluating a Company’s Operating Systems

Successful businesses use systems to manage activities related to marketing, hiring and training, operations, accounting, and order fulfillment, to name just a few. But are those systems as efficient and effective as they must be to allow owners' businesses to thrive, or are owners limiting expansion and growth?

The owner's financial security is dependent on the growth of a company. That fact makes most owners receptive to the suggestion that it is their job to assess the link between their company’s systems and its growth.

Let’s look at one common area in which systems can limit, rather than spur, company growth: the software that manages ecommerce/CRM/data analytics/website user experience/marketing and sales accountability. These systems are constantly evolving in scope and sophistication and have become essential to the operation of successful companies. At the same time, they are growing in complexity and price.

It isn’t realistic to expect owners to stay on top of these essential systems and processes, but it is realistic for business owners to expect management teams to do so. Their teams must intelligently employ software-based systems to level the playing field in which they operate. It is entirely possible to harness the power of systems and to great advantage.

Using state-of-the art software systems/processes intelligently can give a company a competitive advantage, even against larger competitors. Advisors must ask owners to assess whether their management teams are up to the task of finding, training, and implementing such systems in their companies.

Regardless of the particular system advisors and owners assess, if business owners cannot confidently tell advisors that their management teams can maximize the power of an operating system, the advisor and the owner should interview and hire a consulting firm specializing in that particular system.

The Value of Consultants

Yes, consultants cost money and business owners aren’t crazy about spending it, but the Exit Planning Advisor's job is to keep the owner focused on the end game: leaving the company with financial security. Does hiring a consultant cost more than falling short of financial security? Another role the Exit Planning Advisor has is to help owners find the right consultant for the job.

BEI Licensed Member and vice president of Asset Preservation Strategies in San Diego Greg Banner is a great example of the efforts Exit Planning Advisors put into knowing who those consultants are. “Every week I schedule two to three meetings with both existing and potential members of my professional advisor network to find out what ideas and expertise they can bring to my clients. I find out what they do, where their niches are and what type of clients they want to work with.” This vetting process enables Banner to bring in the advisors best able to meet his clients’ needs.

In addition to helping his clients, Banner’s use of a network of advisors pays off for him as well. “I’m able to make referrals to other advisors and my clients view me as the coordinator of all of their advisors.”

In short, installing the best possible operating systems in a company is a win-win for both business owner and advisor. Owners grow their businesses beyond their capabilities and advisors grow their referral networks and their own knowledge bases.