How Culture Affects What Your Business Sells for

Kevin Lovewell

When it comes time to sell your business, most owners focus on the bottom line, on financials and on the obvious assets the business owns. However, it’s worth knowing that the less tangible aspects of a business very significantly impact upon its value, too.


As a business owner holding professional qualifications in accounting and business valuation, I am vitally interested in the different elements that make up a business – and particularly the ones that potential buyers are willing to pay top dollar for.

In representing both buyers and sellers I gather data from many sources – anywhere and anything that will help establish business value. (Incidentally, the due diligence undertaken by potential buyers is now more thorough than at any time I can recall in 30 years.)

Due diligence questions still address the relevant and common issues of performance, productivity, market strength, retention of staff, type of engagement and reward/remuneration – all the ones that you’d expect. However, there is growing interest in questions around the owner’s role and responsibilities, closely followed by the desire to understand the balance between management and micromanagement. In other words, the buyer doesn’t just want to know what they are buying: they are keen to understand how well it works, or doesn’t. Is it a well-oiled machine that runs smoothly – or a spluttering old banger that needs coaxing to get any kind of performance out of?

In particular, one key measure that is cropping up more and more is staff education and training activity. Questions about key staff come to mind here: about their personal qualities, about how the business develops their potential. If a business doesn’t invest in practical training activities, consistently applied over time, then there is good reason to doubt that the prospect purchaser really is offering a business that ‘runs itself’ – a claim often made, but rarely justified!

An alarm bell sounds if the owner claims that ‘You can’t find good staff.’ It suggests that the business has not focused on developing its people, a vital component of value-building. No longer is it acceptable that the business relies exclusively upon the owner to make decisions and take action. A successful business must have systems and processes, couple with appropriate checks and balances.

Businesses are more highly valued, for example, when staff have levels of autonomy in connection with deliverables and problem-solving. A process is demonstrably stronger and more robust when procedures are in place that are people-friendly rather than people-dependent. To put it another way: if your business is not using twenty-first century innovations, then its value is less evident and it will be marked down accordingly.

It used to be acceptable, and even the norm, for there to be an absence of written operation manuals. Today, not only are these expected but required. Further, it is expected that the business’s values will not only be formally stated, but actively shared with the staff.

Change and change management
This brings me to the target firm’s ability to harness innovation and its attitudes towards change and change management.

It would be fair to say that there is more Fear, Uncertainty and Doubt than ever before – both on the supply side and the demand side. The world is changing rapidly, and your prospective buyer is deeply interested in how your business’s internal workings behave in response to these externalities.

Good, tightly-run businesses now take the view that it is perfectly feasible to go out and buy market-penetration or product differentiation held by their competitors or allied entities. And they are much more sophisticated in how they conduct their acquisitions, too: they know what value looks like, and they are prepared to pay for it. One clear indicator is evidence of strategic response to externalities – which is why questions around marketing and operational strategies are so key. Buyers want to understand the profile of recent client acquisition, retention and loss and evidence of relationships being strengthened or weakened. If you can show evidence of a strategy of innovation and change, specifically if it demonstrates employee buy-in, then you will have increased your market value significantly.

Leadership
And it all comes back to the leader, which in most cases means the owner: you. As owners of independent businesses, we tend not to be overly familiar with or interested in academic jargon. We don’t care for words that can seem vague and woolly: ‘culture,’ ‘organisational behaviour.’ I don’t suppose that too many of us could talk for very long about McGregor’s Theory X and Theory Y of staff motivation and team culture. But in our own way we are deeply interested in understanding risk, and seeking to understand how the elements affecting value appear in business.

Knowing how to empower staff, how to maintain their equilibrium and how to have a team firing on all cylinders used to be the domain of firms employing hundreds and thousands. Nowadays, it’s seen in companies with five and twenty staff. Here’s an example. A mechanical engineering firm engaged a business advisor to help them refine their processes in order that they could grow. As part of that consultant’s methods, the owners engaged in what staff rather dismissively referred to as “Rah-Rah” sessions. You know the kind of thing: weekly staff meetings, constant happiness/satisfaction surveys.

As a result, the firm lost hard-to-replace tradies. Why? What the tradies actually needed, and therefore wanted, was better project scoping and measurement tools, better work processes, better inventory management. Instead, what they got was a culture shock – more sales and crowded project schedules with resultant lost time and quality – exacerbated by frequent whole-of-company staff meetings and off-line interviews.

You can guess the outcome: the owners lost traction. Despite increased sales, gross profit declined; there were more rather than fewer customer complaints, and staff turnover became an issue that didn’t exist prior to this exercise in culture management and change.

And there is your evidence: the drivers of value in small and medium companies are presently more aligned (not less) to non-financial aspects of business over the purely financial, and how a business harnesses its labour-force has been shown to improve productivity and profits – and consequently it demonstrably adds value when owners are seeking to exit.

The other lesson that example throws up is equally important: there is no one-size-fits-all solution to culture change, and anyone who suggests otherwise should be shown the door. What you need is someone with the correct combination of skill, qualifications and experience.

Kevin Lovewell is a member of The Network of Consulting Professionals, and an experienced business valuer and business broker. You can reach him on 0401 308385 or at kevin@negotia.com.au.

Photo by Andrew Neel on Unsplash

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