[EP 277] The Systemised Exit: The Impact of Systems on Business Sales

Transcript below!

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Intro [00:00:00]:
Ladies and gentlemen, good evening.

Intro [00:00:02]:
Are you ready?

Intro [00:00:03]:
Okay, here we go.

Intro [00:00:04]:
You’re listening to the Deal room podcast. Join us as we bring you the inside scoop on business, sales and acquisitions, get across trends in the area, and hear the industry’s best recount their real life tips, traps and experiences. Now here’s your host, Joanna Okie.

Joanna Oakey [00:00:25]:
Hi, it’s Joanna Okie here, and welcome back to the Dealroom podcast, a podcast proudly brought to you by our commercial legal practice aspect, legal. Now, in today’s conversation, you’re going to hear from Dave Jennings, author of Systemology and the Ultimate Systems Guru. We’ll explore the essential role that well designed systems and processes play in achieving the best possible price when selling your business. Dave will share why dedicating time to organizing your business can be a game changer, emphasizing how documenting your know how adds value to your business. He also gives us insights and practical advice from his book Systemology to help you on this journey. So let’s dive into our discussion with Dave. Welcome onto the Deal Room podcast. It is so fabulous to have you here.

Dave Jenyns [00:01:18]:
Pleasure. Very much. Looking forward to it.

Joanna Oakey [00:01:20]:
Fantastic. Okay, so look, I just want to preface this by saying I am an absolute lover of systems. Our whole business is built on systems and processes, and I really deeply believe in it from the perspective of the opportunity that it gives businesses to scale well, but also to build something that has a lot of value at exit. And that’s really sort of the conversation point that I want to have today because I think it’s really useful information for businesses as they grow, if they’ve got a mind to exit in the future. But also anyone who’s looking to acquire a business and sort of understand the opportunity of how they can transform that asset through systems and processes once they’ve acquired the business. So I guess I’m going to start with what I feel is a bit of a rhetorical question, but maybe you just give me the answer to it. Do systems you think add value at exit? I’ve already obviously given the answer, but you tell me what you think about it, Dave.

Dave Jenyns [00:02:27]:
100%. And it means that both if you’re selling, you obviously want to add systems in because then you’re going to get a higher multiple. But then if you’re buying, you can also consider whether or not, if they’re light on in certain areas with their systems. That’s a technique you can use to negotiate down in value because you’re taking on more risk without having visibility on, well, what’s going on with these particular tasks and do I have key person risk that I’ll be taking on here because you haven’t documented your process.

Joanna Oakey [00:03:04]:
Do you know what? I love that you’re like right in. That’s it. You’re right at the core, straight up. I just think, absolutely, you’re 100% correct there. Because when we talk about the transfer of a business, we talk about it from the perspective of what is the value in that business and how is it going to transfer to the buyer. And the problem is so many SMEs here in Australia are set up in a way that all of that knowledge, that value in the business often lies in the head of the founder, the owner. And when you get to that point of exit, when buyers come in and they’re sort of saying, well, what is that value in the business? How does that transfer? To me, when the answer is, it’s in the head of the founder, it’s in the head of the owner. Then buyers are, number one, concerned, rightly, but number two, they want the business owner to stay in for long enough for that information to transfer.

Dave Jenyns [00:04:00]:
And I tell you what happens at exit to every seller, I want to get out as fast as I possibly can. So I just think this early understanding for business owners is critical for them in setting themselves up for the right exit.

Dave Jenyns [00:04:14]:
Yeah, definitely. The acquirer is going to want to reduce their risk. And it’s not always the business owner. It can be key team members as well. Maybe there’s someone in the operations department who knows how to make that particular widget better than anyone else and handles all the different cases where it goes wrong. And once the buyer discovers that and they go, well, what happens if they don’t come with the sale or they stick around at the start and then leave? I’m going to have this big black spot of knowledge not understanding what’s going on here. That’s a risk, and I’m going to have to then solve that. So that’s obviously going through their head.

Dave Jenyns [00:05:02]:
And if we know that, like you said, plan early start to document and extract those key processes and organize it. And the whole aim here is to make your business more repeatable. And that’s the big thing that most small business struggles with. It’s not that you have to do everything world class or it has to be the best systems or processes. It just needs to happen consistently. You got to figure out what your way is. And then the person buying the business needs to know. I’m going to be able to continue with that consistency and I’m going to continue to be able to replicate the result because they’re buying the business to continue, at minimum, the result that you’re getting.

Dave Jenyns [00:05:47]:
And they obviously also want to grow it well beyond as well.

Joanna Oakey [00:05:51]:
Yeah, absolutely. And so I feel with developing systems and processes for an organization, one of the barriers is the feeling that it’s all so hard, like the feeling that, oh my God, where do I even begin? Surely you must see this in SMEs as being one of the reasons why they don’t bring systems in, why they haven’t brought systems in across a business.

Dave Jenyns [00:06:25]:
Yeah, I think that’s one of the things that a lot of business owners, the don’t see themselves as systems people. They’re not that way wired and they just make things up as they go. They fly by the seat of their pants and oftentimes a lot of that has brought them the success that they have and why the business has got to where it was, because they just get down to it and just do it. No matter if they’ve got a system or a process or details on how to do it, they’ll just figure it out. And that attitude gets you only so far. But then it also then is what ends up trapping you in the business. Because everybody knows, oh, if something goes wrong, will you go to the business owner and the solve it or the know how to do everything? The business owner becomes that knight in shining armor. And then we train the team to just keep coming back to the business owner.

Dave Jenyns [00:07:19]:
And before long, that’s really what traps the business owner. And I think need to, once we kind of recognize that trap, we need to think about, well, how can we surround ourselves with the right team members and mechanisms to make this easier? Like, if we know systems and processes are important not only to get out of the day to day operations to increase the value on exit. Like, we all know this, we just have to think about, well, if you’re not the best person to be doing the documentation, who on the team is, who is going to be your process champion? Who is really going to drive this forward and make sure that someone’s held accountable because it is arguably one of the most important assets in the business. I think the staff is key, but the staff will come and go. The system really is the only asset that remains in ownership of the business. So it’s very important that we put effort into that particular asset because it can sort of pay such great dividends.

Joanna Oakey [00:08:33]:
No, I completely agree. And in fact, I’ve seen that through my own business. So obviously I’m a business owner aspect legal is a business that I run. And I remember for many years, as I said, I love processes. I have my own systems and processes that I use. But for many years, that was what I did. And then I’d hired other lawyers, and I hired great lawyers, and they did things the own way. It was only when I sort of got to this particular size in the business that I realized relying on good people is not enough.

Dave Jenyns [00:09:07]:
In order to grow a business, in fact, you need that uniformity of the systems and processes that work organizationally to flow them through, to enable you to teach other people so that you have uniformity of the provision of the service quality and the service timing, and all of those things that relate to those core values of the business in the way you provide the service. And so it was this real moment for me that became adorning when I realized systems move from myself to such importance organizationally to enable the business to sales to scale effectively. That it’s not about the people in and of themselves, because this is one of the thing. As business owners, we quite often think it is about the people, but actually it’s about the systems first and the people second is what I think I’ve discovered on my journey.

Dave Jenyns [00:10:03]:
What do you reckon about? Well, I often think that the systems and the processes are just about defining your standards and the way that you like things done so that the team can say, this is how we do things here. And I’m sure you see it with lawyers, but you see it in all departments in the business. If you got five different salespeople, they’re all going to have, unless you tell them otherwise, they’re all going to have five different ways that they’re selling. And it’s the same in the marketing department, the operations department. If you just leave people to their own devices, they’ll all figure out their own way. And there’s no level of consistency. So the key here is to find out the way. It’s the one best way that we sell or the one best way that we deliver that core product or service, and everybody then starts to operate to that standard, and that becomes the baseline.

Dave Jenyns [00:11:06]:
Yes, we can innovate on top of that. Yes, we can re engineer process as we want to improve. But the first thing that you want to aim for is just consistency, because most small businesses just can’t deliver consistently. And the other thing that is a good reminder that McDonald’s’hamburger isn’t the most delicious hamburger in the world or the best hamburger. What they deliver is consistency. You know, when you go a big Mac today is going to taste like the same big Mac in three weeks time. And that’s what has made McDonald’s so popular. And why people come back is because they know what to expect.

Dave Jenyns [00:11:49]:
And small business struggles with that consistency, which helps to set the expectation for the client on what they can expect. Like if a client knows, oh, when I go to this particular business, they treat me this way and they onboard me this way, and I know I’m going to get delivered within this time frame, and I know it’s going to look like this. It’s much easier for someone to do business in that way. And that’s why people keep coming back. So that’s why it’s so important to uncover your way. Oftentimes it’s the business owner’s way. But then we codify that so that it sets a standard, so that the business owner can then go work on something else in the business and know that that thing is still going to be delivered to that standard and consistently, regardless of whether or not they’re micromanaging it and watching it over the top.

Joanna Oakey [00:12:44]:
Yeah, I love it. Okay. All right, so here’s a couple of questions for you. Which systems do you think a business owner should be thinking about in terms of ensuring they develop because it connects. I guess a question is, which systems have the most impact on value at exit?

Dave Jenyns [00:13:07]:
I think the way I think of it is imagine your business as a whole. And the, there are these subsystems underneath, and the subsystems are your departments. Sales, marketing, HR, finance, operations. Now, for the business as a whole to be healthy, which means you’re going to get top dollar, then those subsystems need to be performing. So if one of the subsystems is not performing, it’s going to drag down the health of the whole business. So you do need each of the departments to be running smoothly, like accounting needs to be firing or finance. Sales, marketing, HR, finance. Like all of those need to be firing.

Dave Jenyns [00:13:58]:
Now, the way to then think about, okay, well, what are the most important systems in each of those subsystems? One thing that we do is we apply the 80 20 rule. And I’ll use marketing as an example. I’ll say, okay, well, what’s marketing’s objective? Marketing’s objective is to generate leads for the business. Okay. If we were to apply the 80 20 rule to marketing and say what systems would need to exist or what particular tasks or activities would need to happen, that if they don’t happen, the marketing department is going to fail to deliver on its objective of generating leads. And then you would go through and think about, well, what are the 20% of the systems that deliver the bulk of the result for that department? So every business can be a little bit different. The reason I kind of went through that framework for someone to actually think through is because different business then will have different systems that get identified through that practice. But from a marketing perspective, there’s probably some lead generation systems.

Dave Jenyns [00:15:11]:
There might be a system for setting up an opt in form. It might be a system meeting with your contractor who’s running your Google Adwords. And what do you say in the meeting that you have with them that you have every single month? It could be the monthly marketing report that you run. You have to go through the thinking and think in terms of, well, what does the marketing department do and what are those essential systems? This, generally speaking, a thing I call minimum viable systems, is generally about ten to 15 systems in each one of those departments. It will depend on the business and the products and services. And there are a lot of different variables, particularly when it comes round to operations and client fulfillment, like delivering the core work. But outside of that, ten to 15 systems in each of those departments, identifying the ten or 15 most important is a great starting point.

Joanna Oakey [00:16:16]:
Love it. And I guess like flipping sides for a moment. We’ve been looking at it sell side, although we did briefly talk about buy side earlier, looking at particularly buy side. So we’ve got lots of buyers who we work with or who listen to this podcast. I think it’s useful for them to be thinking about when they’re acquiring a business. Are there some critical systems that really should be in place and therefore are red flags if they’re not there? Or B, is it just more about like, here’s a whole heap of opportunity if we’re finding a business that we’re going into that hasn’t systemized at all, what’s your thoughts on all of that?

Dave Jenyns [00:16:58]:
Part of it will depend on the acquirer’s skill set and where they’re strong. Like, it’s really just about uncovering the risk. So as you’re looking to buy a business, you would be [email protected] chart and figuring out who are in senior roles and what is the work that they’re doing. And again, it just comes down to if that team member walks out the door and so does all of the knowledge with them, how well would you be able to recover? You might go, oh, well, I know sales really well. So even if the sales department head left, well, I think we’d be fine with sales because I’ve got this particular skill set, or I’ve got a team, or maybe you’ve got some existing processes from a previous, like business or something like that, whereas there might be other areas when it comes to client fulfillment, maybe someone doing the work where if that knowledge walked out of the business, you would really be in trouble. So it’s trying to determine where you would get into strife if a knowledgeable team member wasn’t available to help you through.

Joanna Oakey [00:18:10]:
Yeah, that is just fabulous advice, Dave. And I guess I think you have done such a fabulous job in your book. Maybe can you just talk us a little bit through your book and who is it appropriate for?

Dave Jenyns [00:18:30]:
Yes. So I wrote the book systemology, really for the business owner to help to not only build the case for systems, but I feel like most business owners these days. I don’t think I’ve ever had a discussion where we haven’t reached the conclusion that systems and processes aren’t valuable. That always is the conclusion. The bit I always felt was the bit that was missing, which is the how to, where do I get started? What do I do first? What are those first few systems that I should document? Who should be doing the documentation? Where should those systems be stored? How do I get the team behind this process driven approach? What systems might you need for scale? Those sorts of questions is what I really wanted to answer in the book and have effectively the system for systemizing a business. And I think the good thing about with these systems, and once you do document them and you take them with you, no matter what business you go to, you’re building this asset that you can take to every single business. And the more businesses I’ve looked into, the more I’ve realized business is business. And there’s a lot of similarities and a lot of transferring of knowledge and systems that you can just move.

Dave Jenyns [00:19:53]:
Like one system for recruiting and onboarding staff in one business. If you deploy that same system for recruiting and onboarding staff in another business, maybe changing a few of the steps, but by and large the bulk of it is still true and correct. So just getting started, that’s what systemology is about. And filling those gaps and reaching minimum viable systems and building up that asset that you can then either sell or take to your next business or leverage off this idea of systems, you were spot on there.

Dave Jenyns [00:20:34]:
Because I talk all the time about the opportunity that I think SMEs have in understanding the power of acquisitions for growth as an alternative to simply just organic growth. I think one of those really powerful elements is if you have managed to implement systems in a business in a really strong and thorough way. You have so much opportunity then to go out and acquire other businesses as part of growth and then implement the same systems into them. If you’re buying in the same sort of industry, and if you do that thinking once, then you can use that power of acquisition in such a strong and powerful way. So I just think systems are the bedrock of the concept that I talk about all the time of the power of acquisitions for growth in an organization. But the thing is, this concept of acquisition for growth is that if you don’t have a strong base to start from, you can actually do more harm than good to an organization. So really the first step, if you’re looking to use that concept of acquisition for growth, really is making your initial business strong through the use of systems. That’s my thought.

Intro [00:22:01]:
So I reckon everyone who’s listening here should get themselves a book. That’s what I think.

Dave Jenyns [00:22:05]:
I was going to finish with a story. There’s a guy that Michael Gerber introduced me to. Michael Gerber is the godfather of business systems. And he introduced me to, we all.

Dave Jenyns [00:22:20]:
Ken Goodrich is the name that he introduced me to. And he runs a HVAC company, and he built out best practice systems for these heating and cooling business and basically built up his first business and then sold it off. And then he took the same systems, went and bought an undervalued HVAC business that was just about going out of business, moved in, rolled out his systems, increased the value and then sold it again. He’s now done it 18 times. And his last exit was an eight figure exit. Every time he’s exited, he’s now exited at a little bit of a higher value. He keeps a lot of his key team members and the systems, and he just takes it from one failing HVAC business to the next, rolls everything up, builds it up over twelve months, and then flips it. And it just kind of goes to show like they’re the same systems.

Joanna Oakey [00:23:25]:
I love it. Isn’t that? And he’s done that thinking initially, and then he’s just being able to take it and replicate know. I love that. What a brilliant story. Okay, I’ve got the next person I want on this podcast. Dave, what a fantastic. I obviously, I’m not just saying, just I think systems are the core of strong businesses and strong businesses that really recognize the true value that they can get to at exit. And I just think this is such an important lesson.

Joanna Oakey [00:24:01]:
So huge. Thank you for coming on the podcast today, Dave. I’ve really enjoyed having you and having this discussion.

Dave Jenyns [00:24:09]:
My pleasure. Thanks for having me.

Joanna Oakey [00:24:11]:
And how do people find out more about systemology?

Dave Jenyns [00:24:15]:
Best place just head to Amazon search systemology. You can grab the book from there. There’s also the audiobook. If you’re listening to this, you’re probably an audio person, so you can do that. Or if you want to go a little bit deeper or you have some questions need a hand? Head over to systemology.com.

Outro [00:24:29]:
Well, that’s it for this episode of the Dealroom podcast. We hope you’re now primed for your next deal with these pointers and have enjoyed these fascinating insights. Now, if you’d like more information about this topic, then head over to our [email protected], where you’ll be able to download a transcript of this episode, as well as access any contact details and any other additional information we referred to in today’s podcast. Now, if you’d like to get in contact with our guests today and the services they offer, you can go ahead and check out our show notes for a link right through to them and their details. You can also book in directly with our legal legals at aspect legal. If you’d like to soundboard your next steps, discuss a legal question, or find out more how we can assist, whether that’s with buying or selling a business, or perhaps somewhere in between. Now don’t forget to subscribe to the Deal Room podcast on your favorite podcast player to get notifications whenever a new episode is out. We’d also love to hear your feedback, so please leave us a review and rating if you’re already one of our subscribers, or even if you’re listening to this podcast for the very first time, every review helps our team produce valuable content for you.

Outro [00:25:47]:
Well, thanks again for listening in. You’ve been listening to Joanna Okie and the Deal Room podcast, a podcast proudly brought to you by our commercial legal practice aspect legal. See you next time, ladies and gentlemen.

That will conclude this evening’s entertainment. Thanks for listening to the Deal Room podcast. To find out more about this episode and other episodes in the series, check out the show notes or head over to our website [email protected] au.