How to Add Value Post-Close
One thing that I’ve found to be true of most small business owners is that they are fairly financially conservative. That’s because despite being wealthy, most of their net worth is tied up in an asset (the business) that has a lot of people relying on it and is always seemingly a few bad months in a row away from a crisis. So they try to keep costs down and cash in their pockets.
That was the context I gave when I was on a call recently with two gentlemen who wanted to get into the business of acquiring companies and asked me what areas, when we were both underwriting potential investments and helping operate post-close, we could reliably add the most value. And while I said that we typically don’t underwrite to being able to be helpful at all (shoutout margin of safety), we’ve historically been helpful in four areas: hiring (shoutout Kelie), marketing (shoutout Emily), technology (shoutout Johnny), and financials (shoutout Nikki and team).
What’s interesting about these four areas is that they are four areas that a reasonable, but financially conservative, small business owner might view as cost centers. In other words, why pay people to recruit for you when you can do it for free through word of mouth? Or why buy online advertising if you can’t tell how many conversions it drives? Or why get a pricey ERP when a spiral notebook works just fine? And finally why do anything more than file the required tax returns?
Again, each one of these stances makes sense on its face in this context, but without top-notch people, effective marketing, reliable and useful technology, and timely and accurate financials, a business can’t grow. So when Permanent Equity steps in and encourages investment in these areas, while we do hear some grumbling about the cost, we typically get a pretty good return because (1) these areas are important and (2) they have historically not been invested in.
Back when I wrote about brewing the world’s best cup of coffee I mentioned the three paradigms that describe what might lead to success. One is you’re only as strong as your weakest link, i.e. the best you can do is your worst input so always try to raise up your laggards.
In the case of trying to add value to small business operations after making an investment, I think this is the paradigm that best applies. In other words, be useful in an area that’s important but that the previous operator viewed as useless. That’s because nothing (or not much) is likely to have been done in the area before and doing something that’s important is usually reliably better than not doing that something important at all.
-Tim
