Building, Buying, Running and Selling Companies – Part 3
By Barry Farah, October 8, 2019
I have had the opportunity to build businesses from scratch, buy existing businesses, run them and sell them. I thought I would share a couple things I’ve learned along the way. Here, we will take a quick look at running a business.
Running a Business creds: I was CEO of a national business-to-business service for more than twenty years. Concurrently, I was the executive Chairman of a defense software engineering business, which upgraded NORAD’s satellite and radar systems for twelve years. I ran an extended stay hospitality business for five years and parallel to the above ran an executive suites business for eighteen years. I ran a digital transformation consulting and IT Staffing business for four years
Our businesses served well-known brands including Goldman Sachs, American Airlines, MIT, TD Bank, Boeing, GEICO, Neiman Marcus and the United States Air Force. We provided investors with double digit returns most of the time, with the best yielding $15mm for every $300k invested – over a twelve-year period that was solid triple digit territory.
As CEO in a total of six different sectors over nearly three decades, I learned that the job can be simplified in two primary audiences and four responsibilities.
First, you serve your external stakeholders. And, to your external stakeholders you have two primary responsibilities:
1. You are the investor. You deploy capital to increase value. You are “el jefe” of capital allocation strategy, and that is your external lever to increase long-term business value. For me, that includes driving the company’s capital allocation objectives of improving free cash flow and investing in projects and acquisitions with likely returns above the cost of equity and debt. That factors in the hurdle of reasonable estimations of market risk. Whether you are expanding an office or buying another business the hurdle rate needs to be reasonably likely. For example, if your business is ready to add an office do you increase the size of your Miami office or establish a new one in Fort Lauderdale? The prestige of having multiple offices sometimes clouds the capital allocation strategy question. Here is a simplified approach to weigh the decision.
a. Analyze the total cost of increasing Miami’s footprint and compare that to the total cost of adding a new location in Fort Lauderdale. Include all leasing, tenant finish, likely delays, travel from top executives and financing costs. If we need to raise the increased cost of the expansion with debt does that clip our wings in other more profitable ventures?
b. What is the hurdle rate (ROI of the investment) of the new Ft Lauderdale office? In other words, how much higher of a return does the more expensive (risky) option need to be to take it on? Establish before the next step.
c. What is the likelihood that sales will increase as we expect? What happens if we are wrong?
d. Is the projected higher return enough in percentage terms and in aggregate dollars to compensate for the increased risk and uncertainty?
e. Calculate a return on both investments.
If the return for the Ft Lauderdale option is above your hurdle rate move forward with the expansion – if not, just increase Miami’s footprint.
2. You are the customer loyalty strategist. Your COO will pull it off, but you set the strategy. If you don’t have a good customer experience strategy that you like, consider the five steps outlined in my book The Magic Wand, summarized here:
a. Develop and deploy an objective, measurable Customer Experience (CX) vision.
b. Understand each step and touchpoint in the customer’s path and how the customer feels about it.
c. Reorganize all customer touchpoints to create a better, more real-time dialogue with them that solicits from them the kind of interactions that deepen loyalty.
d. Recognize and reward CX knowledge throughout the company.
e. Communicate and measure CX everywhere—from top to bottom.
These steps are achievable by deliberately asking empowering questions.
Second, you serve your internal stakeholders. And, to your internal stakeholders you have two primary responsibilities:
1. Build an exceptional company culture. Use some rendition of the three cultural pillars of Integrity, Innovation, and Invitation. This helps create a talent arbitrage environment. I was able to attract world-class talent with little more to offer than championing the Customer Success mindset. For a quick read on the details of this culture see my book Go Ahead! Unleash a Contagious Customer Success Culture.
a. Build a proactive customer success environment built on rock solid principles.
b. Hire exceptional people with a customer success bent.
c. Train your team to sell with integrity, negotiate with value and serve with excellence.
2. Align your team to increase business value. This includes establishing the strategy for a map of all touchpoints that crystalizes every team member’s OKRs (Objectives and Key Results or whatever metric you prefer). Peter Drucker’s management by objectives is the forerunner to this structure, but I like OKRs because of their simplicity and power. Complex performance management systems have the tendency to become cumbersome over time. The tool of OKRs is a reliable way to encourage the team to stretch in their efforts with energy and passion. And, as long as the CEO is leading the way, the results should yield outsized performance.
The final part in this building from scratch, buying, running and selling series is the exit – selling the business.