Last week I mentioned I am buying a business and I appreciate all of the comments posted. The deal should close either today or tomorrow, and afterwards I will share more details about the transaction and specifically the deal structure and valuation which several of you requested.

One of the comments received was how have I gone about building value in the ten businesses that I have purchased. I will talk about this today since I have followed a very simple formula.

First, let me state that I have never bought a business with a definitive timeline to exit it.

My focus has always been on building the business, and somehow the exit always takes care of itself. However, I have always run my businesses with the understanding that the day will come at some point when I will want to sell it, so I have always made sure to implement initiatives that would not only grow the business, but also make it “easy” for someone to buy down the road.

Step one for me after buying a business has been to do nothing – rather, my objective initially is to really learn the business.

Making significant changes too early not only frightens the employees, but realistically, until you truly understand the business, you cannot make any major changes.

Once past this stage, there are three specific areas I focus on: marketing, systems and personnel.

Systems

I am completely neurotic about this component after buying a business. My objective is always to remove as much human touch in every aspect of running a business except where absolutely necessary. My friend Art Hamel said it best to me one time when we were discussing manufacturing businesses versus services ones. He said that you can rely on machines more readily than people.

However, there is a human element to every business and so the goal is to automate as many human functions as possible, implement technology to improve efficiencies and reduce human error, and monitor all aspects of the business. The objective is to produce data which will measure performances in all areas and allow you to identify sectors that are producing sub-par results, and of course those which are generating above average ones, and improve the ones that are not meeting targets.

To expand upon this note, there are certain positions within a company where I do not want people to think about what they have to do – I want them to know exactly what needs to be done no matter what situation they come across. The only way to achieve this is through comprehensive training and systems to assist the process.

On this note, training and systems are not one-time implementations. They too need to be monitored and so you have to get all the employees to buy into this philosophy and strategy. This means that they too need to always be thinking about ways to make their jobs easier, more enjoyable, and effective.

Marketing

I have spoken about this in past newsletters so I won’t regurgitate the information. That being said, I focus on marketing because I have found that very few smaller businesses do a good job of it. I am nuts about testing, and so instead of dedicating all of the resources to a limited number of initiatives, I test several different “campaigns”. It is important to make any tests independent of one another so that you can effectively measure them.

For example, if you test different promotional pricing, new items, a new website look, or sales script, these should all be directed to different audiences. One may be prospects, one can be active clients, and another can be past clients who have been dormant for a while. The reason to keep these separate is because if you introduce too many variables, it is impossible to know which ones really worked.

Personnel

As an adjunct to the preceding section, hiring the best possible people will go a long way to improve any business. Often times I have taken over companies where certain people are “untouchable” in the eyes of the seller simply because they have been there for a long time. While it may be true in some cases, these can also be situations where long-time employees are terribly adverse to change and can actual stifle the company after buying a business.

It took me a long time to feel comfortable hiring people who knew more than me. I was probably insecure early on in business, but once I got past that ego issue, it is amazing how quickly I learned that great people can have a massive impact on a business.

With employees, my goal has always been to have them evolve to the point where they do not need me there every minute to manage the business. Again, this ties back to systems and training. When it comes to customer issues, I have always built businesses so that every employee who deals directly with our clients has the authority to do whatever is necessary to make that client happy. If there is a problem – fix it and fix it fast – that is the golden rule.

By having this strategy in place, not only does it allow me to not micro manage, it always provides a huge comfort level to any prospective buyer down the road. They immediately recognize they can take over and have a support staff that will allow for a very effective transition post-sale, and also dramatically reduce their reliance on the seller.

By following these three simple rules, I have been able to significantly grow seven of the ten businesses I have purchased and to sell them for a lot more than I paid originally (I still own one and I made a mess of two others). These initiatives are really not that difficult, and often times their implementation is more common sense than anything else.

If you follow these rules, not only can you grow the business while running it, but the offshoot is they build value by default and so you end up winning twice.

Take a moment to read a terrific article about how to run your business like you have to sell it.

Have a great week.