Mark Sims: The Operator's Playbook - What Buyers See That Founders Miss

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Speaker E: mobile.com I'm so excited to talk to you about the strategies and the perspective that you bring on what buyers are really looking for and why deals fall apart and how can build businesses that stand up to scrutiny and sell. So, Mark Sims, welcome to the podcast

Speaker C: was the worst year for a lot

Speaker A: of us for our, uh, mental as well as physical health. So joining us this morning is best selling author coach, Lisa Goldenthal.

Speaker E: Hello and welcome. I'm Lisa G. Your host. You're at the top of your game, yet the game is changing faster than ever. Strategies that got you here aren't the ones that'll keep you here. The pressure is relentless and the fear of obsolescence looms large. That's why I'm here. Welcome to the new podcast series Disruptive how to be gritty and unlock performance in business, Mindset, wellness and success to help you master disruption. Thanks for coming and we'll see you soon. Foreign. Welcome back to the show. Today's guest is, has spent more than 25 years sitting in the seats that matter most, like the CEO, cio, head of strategy, operator, investor partner and transformation leader. And I'm so excited to talk to you about the strategies and the perspective that, that you bring on, uh, what buyers are really looking for and why deals fall apart and how can build businesses that stand up to scrutiny and sell. So, Mark Sims, welcome to the podcast.

Speaker D: Hey, thanks so much for having me, Lisa.

Speaker E: I love that we're so aligned on so many topics about owner operator. So why don't we jump right into, I mean, you've sat on both sides of the table. What's the biggest misconception that founders have about what buyers are actually evaluating?

Speaker D: Sure. You know, I think one of the big things that, uh, we see quite often is sellers, uh, think that someone's trying to steal their business. Right. Uh, and a lot of that goes back to, um, you know, the people are only going to pay for the value that they believe they can actually transfer to themselves. Right. So I think that that always breaks down in two ways, like what are the earnings of the business? Right. And, and a lot of times that's where, you know, companies, they don't have a good perspective on like how much the business actually, actually produces. Um, and so when somebody, a third party comes in, they take a look at that. And then the other thing is what they call the multiple. Right. And it's shorthand for a way that, you know, how we determine how many, uh, six times, eight times your, your ebitda. Ah. And so a lot of times if, if, um, a founder, owner, owner, operator doesn't understand kind of how businesses are valued, uh, to them it's very valuable. But then they have a third party come in and they say, well, we see These types of deals all the time, and it trades at five times or seven times, and the number maybe isn't as, as big as maybe somebody else, a friend of theirs that has a software business, right. That trades at a higher multiple. And so that's, that's kind of one of the things that we see quite often. Um, I think the other one is that a lot of times the sellers aren't fully prepared, um, to start selling the business. And I think that's one of the things that, with a little being more proactive, as you preach, than reactive, I think that's a big area where, um, people can create a lot of value or at least preserve a lot of value, uh, prior to entering into any kind of sale process.

Speaker E: Okay, well, do you want to unpack a little bit? What by being proactive versus reactive would mean on getting your business ready to sell?

Speaker D: Yep, sure. No, absolutely. Uh, and again, you know, I like to use analogies. Uh, a lot of times, you know, real estate are good ones, but if you're, if you're selling your house, right, you usually kind of walk around and all the things that you've kind of put up with over time, you know, the, the, the wall that still needs to be finished or the, the rust, the, the squeaky door, etc, you look to take care of all those things, um, prior to putting the house up for sale and having someone else walk through. I think the same thing is, is true from a business I, I call my five C's of value creation or value preservation, um, and they're really, you know, kind of, I think, somewhat pragmatic, uh, and don't take a tremendous amount of time. But it does take a little bit of being proactive and organized. Um, but the. I'll kind of run through them and then we could maybe, uh, dive deeper into a couple of them. But the first one is kind of understand your competitive positioning.

Speaker E: Right?

Speaker D: So if you have a roofing business, um, you know, where do you compete? Why do you win within your given geography? Second one is around cash flow cycle. So do you understand how the company actually, you know, converts cash from buying a product into receiving cash from, um, a customer? You know, what is that process? How long does that take? Are you managing that process? Well, uh, third one is around a clear set of financial data. Right. So can you. It's great that you can anecdotally tell me where and how you make money, but do the numbers actually back that up? Right. And a lot of times that's where a lot of misconceptions are where founders think they're making money. Um, maybe was true five years ago, but the business has evolved. Um, the fourth one is around concentration free. Right. So, you know, how do I make sure that I'm not, you know, uh, incredibly levered to a single set of customers and, or a single, you know, vendor, uh, for, you know, particular product. And then the last one is around, uh, capabilities, uh, and again, that spans the gamut from, you know, having SOPs, making sure that the owner operator isn't making every decision and they haven't kind of enabled the, the organization to run without them. Um, because if you're about to sell the business and you make all the decisions and you have all the, the issues, um, or handle all the issues, that's going to be a challenge.

Speaker E: Well, I love Five. I mean, because we both are so aligned on that. If you're. All the decisions come back to you as the founder, owner, operator, then why would another business want to acquire you? So do you want to dive deep into five a little bit deeper?

Speaker D: No. Absolutely. And, you know, it, you know, it obviously makes kind of, um, practical sense from the standpoint of, um, someone if they're going to write you a big check, right? There's, there's two challenges. You know, even if you say, hey, I want to stay in the business, I want to keep on, uh, and maybe move into a different role, um, you know, maybe you haven't had a boss for 20 years, right? Now you're gonna have a boss and you might have a board. And so that sounds good, maybe during the sale process. But, you know, three months in, it may not be as attractive. But if I've bought the business and I'm relying on, you know, you to teach me the business, um, that's probably a little longer Runway. The other thing that's changed is I gave you a big check, right? And so a lot of times people, we, we see it a lot where, you know, folks think they want to stay in the business, but their perspectives change, uh, now that they've kind of exited the business. Um, you know, it's, it's. You're watching someone else kind of take your life's work and maybe make some, uh, changes that you wouldn't have made. Uh, and sometimes that can be challenging and difficult if people don't think through it. Um, but all this comes back to, uh, the reason you don't want to have, you know, you want to build a team that's going to run the business is because, you know, buyers are going to pay for transferable value and they don't want to buy, they want to buy a business. They don't want to buy an owner operator. Um, because that's, that's really not what the deal is. The deal is you're buying the business. And so having the SOPs, having the team and you know, empowering the team to make decisions, make mistakes, all the things you kind of hear and read about that's uh, going to pay dividends when you go to exit your business.

Speaker E: I love that you mentioned empowering the team to make decisions because you've hired these high performer rock stars and those are, that's your team. You should delegate decisions to them and just say this is yours. Right? Like everything can't keep coming back to you.

Speaker D: Yeah, no. 100 and I think it's you know we're talking about kind um, of an owner operator. But I, I see it and I've experienced it. You know, I worked, now I'm in consulting, uh, but previously had been an executive with ah, a Fortune thousand company. Um, and you know I, I saw that in different areas when I would take it on leadership positions in different roles. And so I'm sure a lot of your listene who have you know, kind of similar, you know, positions within a company, um, a lot of times you, you need to make sure that you're not, is the manager as the director, whatever leader of a given area that you're not doing the same thing that you're trying to make Every decision that you know, every, you know, everything needs to come through you because a that's going to you know, stunt the growth of the team around you. But it's also not practical. Right. Like if you left for on vacation, you want to be, you want to feel good that the, the business is going to continue to operate um, just as if you were there. Right. If everything comes to a standstill because you're sick, uh, that's a red flag.

Speaker E: Oh, 100. I'm so glad we're so aligned on that. And it also empowers your team to feel like they own that their ownership is, this is their department.

Speaker D: Yes, 100%.

Speaker E: And also there's another topic I wanted to dive into um, regarding like due diligence. If m someone's looking to acquire your company, what are some of like early warning signs that experienced operators would recognize immediately?

Speaker D: Yeah, I mean I think the five C's I talked through are the same. You know, it's a lens that as a buyer you want to look through as well. Right. So do I understand the competitive positioning of the business that I'm buying? Right. So if I'm buying a, a residential roofing business, uh, do I understand, do they have a 70% market share in their area? So growing it may be challenging. I may need to look to other geographies, etc, but it all comes into understanding how you're going to create value with it. Um, but the biggest thing that, that we find that, you know, can slow deals down and, or adds tremendous amount of friction is really that third one around the clean set of financial data. Right. If you're really making it hard for the buyer to understand your business and how your business makes money, uh, it's going to add friction. Uh, some people may, just, some people may come along for the ride and say, I'm going to figure it out. But where a lot of times that then, you know, kind of comes, uh, up is in the multiple that we talked about. Right. So most businesses traded a six. But because, you know, uh, everything seems a bit of a mess and I had to figure it all out and it took two months because, you know, we were, you were giving us kind of fragmented information. Um, maybe I'm going to give, uh, you know, pay a 5 multiple or whatever it might be. And so I think anything in a deal, just like, you know, whether it's a deal to buy a business, a contract, you know, around a piece of property or even a contract for, um, you know, with a customer, you know, anything, anytime you add friction into that process, um, that's, that's a potential deal, uh, killer, or it's, it's going to start to erode value.

Speaker E: Yeah, it's really hard to get a confused mind to take action. So if your numbers are not clear, then they're not. And then you're saying that you're not going to make as much money on the deal. Your evaluation is not going to be as strong as somebody who has all their ducks in a row.

Speaker D: Uh, right. You know, a lot of people will say, okay, I'll buy it, but you know, I'm gonna have to do a lot of work. Right. So, you know, the way I see it, sometimes we see this sometimes with uh, buyers when there's a business that's been m. A seri, it's been built, uh, through acquisition, uh, but they haven't integrated the businesses. Right. So there's really, you're, you're not buying a business. You're buying five separate businesses that have to happen to be owned by, uh, you know, one owner. Um, and that's not to say someone's not going to transact and buy it, uh, but they're really signing up for a project then because it's like, you didn't do the work. Now I have to do the work. And so that, that again, starts to impact valuation, um, and potentially limits the buyer, potential buyer pool. Because maybe folks aren't, you know, they don't want to take on all that work. They have, you know, other things that they want to do, uh, and where they want to invest resources to actually grow the business.

Speaker E: Okay, well, so then what separates companies that integrate successfully after acquisition from those that are still struggling?

Speaker D: Well, I think so much of, uh, an integration plan has to start during, uh, due diligence. Right? You don't want to necessarily, you know, buy it, buy the business and then say, okay, well what are we going to do with it? Right. And again, most buyers, you know, have a lot more perspective than that. Um, but I, I think, you know, so having a clear understanding of, you know, financially, sorry, operationally, how are we going to combine the businesses? Are we going to have a single salesforce? Are we going to continue to maintain two, Maintain two salesforce? What are we going to do with the back office, right, and the billing folks and, you know, the finance folks, but having a plan, uh, as to what you're going to do, and maybe it's not the first priority, you know, out of the gate and. But as long as you're making that decision during the diligence period prior to close, um, you know, come up with a plan and then stick to it. That's probably the biggest thing, Lisa, that we see is people, you know, they have a plan, they, they know how they want to integrate the businesses, but then they, now they turn over the keys. Now they own IT operations, starts to really, uh, uh, you know, operational issues, operational opportunities, um, start to take over. And things that are more strategic, projects that are going to take some heavy lifting, uh, those get put on the back burner because I have urgent things that I need to take care of. Um, so that's a lot of times where we see the work. You know, people had visions of integrating the businesses, but because other things came up, they didn't prioritize that. Uh, and again, it then becomes, you know, an ongoing problem where you have two sets of books, you have, you know, potentially two teams. You're not able to present, um, one face to the customer. Uh, when you're selling, maybe you can't cross sell upsell between the businesses as well, um, so it's really kind of again, super basic stuff. Make sure you have a plan, build it during the kind of the diligence period prior to close and then make sure you're, you're holding yourself accountable to execute the plan, uh, as, as you uh, laid out.

Speaker E: Absolutely. I, I find that sticking to the plan is such great advice and having somebody who can hold you to the fire, hold your feet to the fire and be like you said you were going to do. X How did that go this week? And I love holding people to the highest level of accountability. And as a consultant I'm sure that's something you're passionate about too is keeping people sticking to the plan.

Speaker D: No, 100%. You know, it's the um. And again a lot of the times, you know, we, we kind of support businesses uh, in three phases. One, we help them transact, talked a lot about that. M and a advisory, uh, transition, uh, so we'll step in as interim management, uh, as needed and then transform. And so that's where I spend a lot of my time is on the transformation. Uh, sometimes it's in you know, integration times, it's splitting businesses apart, sometimes it's new systems capabilities, et cetera. Um, but so much of that is, you know, we've got these transformational initiatives. We need everybody to be executing to the plan and holding people accountable. Uh, because usually there's a lot of expensive resources, both internal resources that are focused on the project as well as external. Uh, and so you know, any delay by a week, a month gets very expensive.

Speaker E: So stick to the plan. I love it. Okay, final question. If you walked into a company today that planned to exit in the next three years, what would you audit first?

Speaker D: Yeah, again I, you know, I'm going to be repetitive. I would think, uh, I really would want to understand, uh, do they have good, uh, and clean financial data? Right. And we talked a little bit about just, you know, just having the data. The other thing that we see a lot of times with owner operators there may be a lot of expenses that aren't kind of um, full business expenses if uh, if another owner uh, owned it. And so I think starting to clean those things up and those things obviously during Q of E and financial due diligence, you can basically, you know, kind of adjust those things out. Uh, and you know, adjusted EBITDA is usually what people talk about. But as much as you can have like a 12 month period where some of those things uh, aren't in the business, maybe you know, uh, people that that are part time contributors, uh, uh, that are still on the payroll, uh, that wouldn't be on the payroll after you close the, the, the deal, you know, pulling those, pulling them off, uh, and getting kind of a true, I'll call it pro forma, um, look at you know, what the business would look like as if ah, another um, owner ah, ran it. Uh, I think that's a, that's a clean one or a key one. Excuse me. Um, because the reality is as much as we've talked about like understanding, competitive positioning and you know, some of those other things, ultimately it comes down to the numbers, right? Like what is the value of the business? Um, you know, you first and foremost need to understand is that real EBITDA number. And then the other things we talk about really kind of impact, you know, positively and negatively. The, the multiple.

Speaker E: Well, thank you. I mean after 25 years leading strategy, technology, operations, M and M and A and is there any final thing that great operators need to understand that everyone else learns too late?

Speaker D: Um, the, the one thing I always go back to, I always forget this lesson and then, you know, I go back to it is you know, focus on the basics. Right? So again whether it's around, you know, problem solving truly, you know, kind of challenging people as everyone gets worked up on a given issue, like what really reinforcing what problem are we trying to solve or you know, as it relates to, you know, something isn't going well on a given project, with a given customer, etc. Really kind of go back to the basics of you know, for that given process are we delivering on, on all the key tenants of that process. Uh, and it's, you know, a lot of times it's, it's really the basics that are getting uh, forgotten or you know, getting overlooked. Uh, and if you straighten those things out, usually uh, you get a much clearer picture of you know, is there anything higher level from an issue. So like I said, you can always get um, kind of blinded by thinking that ah, an issue is more complex than it actually is. Uh, so I always challenge myself to kind of, you know, step back and really think about the basics of uh, of what it is and can I really truly define the problem?

Speaker E: Clarity is king. Mark Sims, thank you so much for being such a great guest. It was a pleasure chatting with you today. Where can people find you?

Speaker D: Sure, directly people can email me msims m s I m s@consultmsg.com uh, or they can find my firm@uh, consultmsg.com.

Speaker E: well thanks for being a great guest.

Speaker D: Thanks so much for having me. This was a lot of fun.

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