One of the most important questions a business owner can ask an investor is “what kinds of things would you look to do in my business if we become partners?”. Since this is something we discuss a lot with owners, I decided it makes sense to put some thoughts together on the more common items we look at the beginning of (and throughout) a partnership.
Before we dig in, I want to highlight a few caveats about the below information. First, we do not believe in prescriptive remedies at ValueStreet. Every business is different; some businesses would benefit from all of the below initiatives, while others might only benefit from one or two (or from others not necessarily listed here). Second, ValueStreet is not a traditional private equity firm. As a firm that invests in companies with the intention of never selling, our approach is a long-term one focused on value creation over decades, not a few years like other firms. With that said, here are six high-level items we prioritize in our partner companies.
1) People & Staffing – Ask any small business owner what their foundation for success has been and you’ll almost always get an answer that acknowledges people. As a people-focused investor, we make identifying and growing talented people in the companies we invest in a priority. The most practical application of this focus is staffing and recruiting, a discipline that can feel burdensome for many business owners and their HR staff. Most of the time this is because staffing feels like a hamster wheel; hiring three candidates to find one that stays is not exactly an inspiring process.
When assisting our partner companies with recruiting and staffing strategies, our focus is on laying out a process that will help to systematically identify things in individual candidates to reduce attrition (get off the hamster wheel) and bring long-term talent into the company. We’re looking for similar things to other owners – things like: culture fit within the organization, skill fit for the position being filled, and general character and personality types.
The difference in our approach might be the structure we build around the recruiting and interview process; a structured and thoughtful process that scores candidates against desired attributes helps us iterate over time to so that our process can evolve (if you can measure, it you can improve it). A candidate that scores well skill-wise, for example, but poorly for categories relating to long-term viability would quickly be shuffled out in favor of a high character, good long-term fit with the potential to develop needed skills. Having quality processes like this in place makes it more possible to scale teams over time. Will we still get some wrong? Sure, but at least we’ll be able to learn from them.
2) Systems Building – Employees are only as good as the systems they work within. In conjunction with finding the best people, we strive to understand the nuts and bolts of an individual company to identify how things work now and how they might work better in the future.
Systems building – designing or refining processes for training, marketing, selling, or financial reporting – is not sexy work. Slow and steady is almost always better here – grand visions and sweeping changes look great on paper but hardly every pay dividends in the real world. Still, systems building is some of the most important work a small business owner can do.
Systems make every living thing more robust. In nature, evolution has produced systems across millennia to help living things protect themselves and compete for the resources they need to survive. Businesses are no different; it’s up to a business’s owners to map out the initial systems that will allow it to thrive.
In a best case scenario, the system doesn’t rely too heavily on any of its individual parts. Managers are vital to any company, and particularly smaller companies, but the best companies empower employees at every level to make business-critical decisions when they need to be made. If a manager can’t make him or herself obsolete, they haven’t built robust enough systems or empowered junior employees properly. Ralph C. Stayer’s book Flight Of The Buffalo is a wonderful analysis of this type of thinking and I highly recommend it.
3) Cost Accounting and Gross Margin Analysis – Cost accounting is a familiar concept to most business owners – it’s a thorough analysis of a business’s costs to help improve management decision-making. Gross margin analysis – the process of understanding how much profit a business’s core products or services earn – is made possible by a thorough cost accounting, and is vital to operating a business successfully.
Monitoring gross margin for products and services across the whole business is a good first step and one that is worth taking. To truly understand what it costs to produce a product or service, however, more analysis is needed. At ValueStreet, we’re typically also running models with our partner companies for gross margin by division (or segment), location, customer, and employee.
While this might seem like overkill to some, we view it as vital. Knowing how much raw profit is derived from key customers, for example, is the first step in knowing which customers deserve your attention and which may present revenue concentration risks. You might, for example, have two customers – let’s call them Customer A and Customer B – that are typically billed for $100,000 in revenue per year. At first glance, these customers might seem equally important to the business. But gross margin analysis will reveal that customer A is actually costing the business money, while customer B is adding $50,000 to the bottom line (a whopping 50% gross margin). In this case, you might consider re-pricing services for customer A (or ending the relationship), and look to expand your relationship with customer B (or find more customers with similar needs). Those management decisions would have been impossible without knowing where the profit (or lack thereof) was hiding.
4) Marketing and Business Intelligence – It’s often said that the best businesses would continue to grow without any marketing (think Coca-Cola, or Facebook, for example). Sadly, the rest of us will need to engage in some form of marketing (or sales, in a B2B environment) to grow revenues meaningfully.
Over time, I’ve found that companies who market themselves efficiently don’t always have the trendiest brands or the most fashionable ideas. Rather, they tend to be the ones who know their customer and follow a measurable process of ideation, implementation, measurement, and refinement to produce real results.
If I had to pick one, I’d identify a consistent measurement plan as the most important part of the process. Basic things like a good web analytics set up, for example, are really important. While many companies have a free analytics program installed on their website, few have a robust tracking and measurement strategy that gets meaningful internal discussion at management meetings.
Beyond these basics, we also like our partner companies to tie marketing and advertising data into a bigger picture business intelligence strategy that allows them to keep an eye on the data coming into the business in near real-time. This allows us to see traditional digital marketing metrics like ROAS alongside other KPIs in our businesses that are meaningful to our growth efforts (if growth is a priority for that particular business). Seeing the connections between data points can add to everyone’s understanding of the business. Further, knowing where we stand is critical to knowing where we’re going, and marketing measurement, incorporated into a broader business intelligence strategy is an important part of that process.
5) Professional Services Resources – Accounting, tax, legal, and insurance are the last thing small business owners want to think about on a day-to-day basis; they’re also some of the most important items to get right. As a professional investor, ValueStreet has developed longstanding relationships with professionals who can help assess the risks and opportunities in our partner companies and recommend solutions that might be a fit.
I can’t (and won’t) say our service partners are better or worse than others, and we don’t force our relationships on anyone. What’s important to note here is that solutions are available, and can be delivered by folks we trust our businesses with (and we hope you will too). If you’ve run a company for long enough, you know how important it is to have partners you can say that about.
6) Long Term Investments – Long term investments in high-return strategies can be one of the biggest competitive advantages for any small business. Unfortunately, two problems confront most business owners: first, it’s hard to know where to invest. A data-driven culture can help, but the best investments sometimes require a mix of insight and intuition. Second, long-term investment requires spending hard-earned cash on things that aren’t guaranteed to return money. Unlike public companies, the owners of small companies live off the earnings their businesses produce, so investment often means less personal savings, along with fewer vacations and less overall security.
A private equity partner like ValueStreet can help a lot here. As investors seeking long-term appreciation of our capital, we have no problem investing in something like a long-term SEO (digital) strategy or a big capital expenditure that will yield dividends for 20+ years. These are the kinds of opportunities we think can help distinguish great companies from mediocre ones, and where ValueStreet’s long-term outlook can be a unique differentiator to our partner companies.
The above are just a few of the more common initiatives that we would consider suggesting to management of a company partnering with our team. Since every situation is different, I recommend getting in touch to discuss the specifics of your business and what might be possible with a patient, capable partner like private equity partner like ValueStreet to help grow your small business. Until then, see you out there.