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Building an Owner-Independent Business: Impact on Valuation and Growth Potential

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Building an Owner-Independent Business: Impact on Valuation and Growth Potential

By , January 19, 2024
Joe Graci_quote

 

 

 

Joe Graci, a seasoned business builder with over 20 years in the technology industry, shared his captivating journey of transforming a company, Interwork Technologies, into a thriving business. Starting with a vision to elevate the company’s performance, Joe strategically shifted the focus to cybersecurity, leading to remarkable revenue and profit growth. His hands-on approach in redefining the company culture and empowering the team was instrumental in achieving sustainable success. Joe’s insightful experience emphasises the significance of transitioning from working in the business to working on the business, fostering creativity and innovation within the team. His story reflects the pivotal moment when he realised the importance of building a business that was not solely reliant on him, ultimately contributing to a successful exit strategy. Joe’s journey is a compelling reminder of the transformative power of strategic decision-making and effective leadership, offering invaluable insights for business owners seeking to maximise their company’s value and prepare for a successful exit.

In this episode, you will be able to:

  • Maximise business value by implementing growth strategies.
  • Elevate your business by transitioning from working in it to working on it.
  • Enhance your success through the importance of peer networks.
  • Increase productivity by systemising workflows in your business.
  • Achieve freedom by building an owner-independent business.

Demonstrating Business Independence
Proving that a business can thrive without constant input from the owner is a critical aspect of demonstrating its independence. This is particularly important during the due diligence process where potential buyers are keen to assess the continued growth potential and operational smoothness without the active involvement of the owner. Fundamentally, this is a true test of the business’s independence from an owner’s perspective. Joe Graci emphasised the importance of showcasing this business independence during the due diligence process. He highlighted that continual growth and smooth operation without his constant involvement were key indicators of a healthy and autonomous business. Such independence was not only a commendable aspect for potential buyers but also significantly influenced the perceived risk and eventual purchase conditions during the process.

Transitioning from Working in the Business to Working on the Business
Building a successful business requires both deep hands-on involvement and strategic oversight. The challenge for entrepreneurs lies in finding the right balance between working in the business and working on the business. Initially, most owners invest their time in daily operations, shaping company culture, and managing staff. However, as the business matures, it’s important to step back and spend more time on high-level tasks such as leadership, long-term strategy, and developing systems. This transition can be vital for sustainable growth and offering a culture where the team becomes empowered to handle more responsibilities, thus creating a more scalable operation. As Joe Graci experienced in his journey with Interwork Technologies, recognising the need for this key transition can be a game changer. His shift from deep involvement in daily operations to a more strategic role resulted in continuous growth for the company and ultimately added significant value to the business. He emphasised systemisation and standardisation, which allowed his team the room to take on more responsibility and foster creativity and innovation within the predefined framework. Setting the vision for his team, Joe offered freedom within structured guidelines, allowing for a more proactive, self-sufficient workforce.

Watch the episode here:

Welcome to the podcast that’s dedicated to helping business owners prepare for exit so you can maximise value and exit on your terms. This is the Exit Insights podcast presented by Succession Plus. I’m Darryl Bates- Brownsword, and today I’m talking to Joe Graci. Joe’s based in Toronto, Canada, and he’s got a fantastic story to share with us, just around his experiences of growing his zone business and running it and exiting it, and end up selling it to a strategic buyer. So welcome, Joe. Thanks for joining us today.

Thanks for having me, Darryl, I really appreciate.

I’ve just. Joe, I’ve introduced you, but I’ve possibly slid over things a little quickly. Why don’t you just give us a little bit of a background about the business that we’re talking about, just some headline levels and high level of the journey, and then we can dig in. Because what I really want to explore with you today is your experience as the leader of the organisation and just what that meant, and as a leader and owner of the organisation, just how you found that experience, shall we say?

Yeah, so I’ve been a business builder my whole career. So I’ve been on the business side of the technology industry for over 20 years. And I had a really great opportunity when I was recruited to run a north american level software distribution company called Interwork Technologies. And that was the real test around how to build a business, from taking it from its old sort of vision and way of doing things to creating a whole new vision and taking it into some really different spaces.

And so that was a really exciting journey. We had nine consecutive years of revenue and profit growth. I sold it to private equity after seven years. I stayed on for a few more years at my option and we sold it again to a strategic buyer. So since then I’ve been doing some investing and advisory work. But that was a really interesting experience.

Yeah. Would you say seven years or nine years of growth? What sort of growth are we talking about, Joe? Year on year growth, just to set the scene?

Yeah. So it was a mature company. We started at 40 million in revenue, and at the end of it we grew it to 100 million in revenue. So some years we had 10% growth, other years we had 20, 30% growth. But it was very consistent both on the top line and the bottom line.

It’s an interesting point you make around the growth varying between ten and say 30 or 40%, because I guess a lot of people hear about startups and having their wild ride and they tend to think of if they were to draw a curve on a graph of some sort of exponential line, a curve sort of gradually getting steeper and steeper going up, or at least a straight line graph with a steady gradient. But the reality is, and similar to what you’ve just described, is that they tend to grow in steps. We grow a bit and then we fill out the capacity, then we grow a bit more, and then we fill out the capacity, and we refer to it as platform and growth. And is that something that was deliberate and conscious growth, or looking back, was it just kind of, that’s the way it unfolded for you guys?

Well, we made some really important strategic decisions early on. So when I took over the company, it was in various technologies, trying to be a specialty distributor, but we had a very generalised strategy around what technologies that we were supporting. So when I went in, we realised that we were sitting on some really important assets in the cybersecurity space, and that was growing at three times the rate of the rest of the it industry. So we made a decision to double down on the cybersecurity industry, and that’s what really paid off for us. So there was some in those first few years, it was some restructuring of product lines, of people aligning our teams, our capabilities, et cetera, and then going to market, and then it just sort of took off. So we had those early years of 10,15 percent growth, and then we had some years where it was more like 20, 30% growth, but it was reflective of some of the strategies that were starting to get implemented.

Okay, so you’re talking about strategy, and when you plan, know, put strategies in place, the outcome is you get growth lagging after the plan. Does that link back to, I guess, the classic of what we hear as business owners that really comes out of Gerber’s book about working on your business rather than in your business. Is that something that you consciously did  and aim to apply?

Yeah, absolutely. And I think there’s some important steps there, because sometimes you have to work in the business so that you can get to working on the business. So I’ll give you an example. When I first started, the culture was fairly weak. We needed a new strategy. Our people, the skill sets weren’t quite aligned. So I had to get in the weeds. And I was in the weeds for a good twelve to 16 months on getting those pieces, I would say correct course, corrected or in place. Sometimes it requires us to be in the business, but I think the challenge is knowing when to pull yourself away and let go and start working on the business. So working on the business is more around leading, culture building, strategising, creating systems and templates for your team, managing performance, advocating, evangelising for the company. Those are all the skill sets and time that you need on working on the business versus in the business where you’re monitoring and quality control and you’re attending every internal and external meeting just to make sure things are going well. And that’s where you can really get caught in, say, the forest of business.

Yeah, look, and I guess for a lot of people who found themselves ended up owning or running a business, it can be a hard transition to make because they started their business based around a skill or a technical ability that they had. And then as they grow their business, they’re really good and they’re typically the best person at that skill in their business. And then at some point they need to back off, they need to mentor, they need to guide, they need to have built the systems for others to do things, the ways that they’ve applied their technical expertise, and then they have to make the transition. And I’ve seen the struggles a lot have with that transition in that they go, well, I know what I have to do day in, day out when I’m working in the business, the feedback is, I know what I’m doing, I can be productive, I can be generating revenue for the business.

But you tell me I have to work on the business and no one’s really taught me how to do that. And I’m not sure I know where to start. And when I just sit down and think, I struggle to see that as value and how it’s going to add value to the business. And I’m not really sure what I should be thinking about. Have you got any insights there, Joe, how you made that transition and from in to on the business and what you experienced?

Yeah, so first off, what I did was within one year of getting that first sort of role, leading a company and running it was I joined a peer group, which was helpful because I needed to think a little bit differently about the business. And I was getting a little perplexed at why everybody was agreeing with me and thought all my ideas were great ideas. So I realised then that I needed a network and a group that I could take important issues and learn from people who have been in those places before. That was one thing that was really helpful to me. And the other things that are really important in terms of trying to pull yourself away is to start thinking about systems and processes and templates and how to enable your team and sort of create this. I had a customer service attitude around my team, which is they were my customer. And so I was really trying to figure out what are some of the things that are going to make it easier for them to do their jobs, to enable them to be more independent, to make autonomous decisions. And so I focus more of my attention around systems, templates, processes to enable them.

Okay. And when you say you’re systemising and structuring or really standardising the workflow of the business, have I understood that correctly? So it’s reliable and repeatable and consistent?

Yeah, absolutely. My role in that was to define what that looks like. It wasn’t my role to start managing it and implementing it. Okay.

And that’s the difference between working on the business versus in the business, because I think some leaders get caught up in the implementation of that. I think what’s important is you actually define what it looks like and then bring your team in to be able to work on it and implement it, or perhaps have some external help along the way.

Yeah, so you design it. So your big idea, strategic idea, was to design it and then go, hey, look, guys, we need to make this happen. A lot of pushback, I guess when we talk about systems and structuring and standardising workflow for consistency is a lot of people go, that restricts creativity. And if I’m understanding your business, when it was in those high growth phases, like it’s creative entrepreneurial businesses that do have those high growth, did it stifle creativity? What impact did it have on innovation and creativity in your business?

It actually enabled creativity and innovation because my role was to set the framework and then we left it up to the teams to decide and make some of those micro decisions on what makes sense for them, what makes sense for their workflow and for their process and whatnot. So I’ll give you a bit of an example. I said, one of the key initiatives we did was we said we’re going to go paperless.

So everything we do and everything we look at, everything we touch, we want to just digitise our whole process. Right? And so that was the goal, that was the overarching goal, and we actually set objectives around that. And the objectives were, and this is where we can sort of get into a little bit of some of the management that we did. But every quarter we had quarterly bonuses and objectives that we would set for our team members.

And within it, we would say identify two or three processes that we can digitise or remove paper or manual handling from, and they would come up with their own ideas around that. I think sometimes you set the vision and the goal, but you have to allow your team to sort of rise to their level of creativity and innovation and be able to make recommendations and where you’re actually acting upon it and taking those recommendations and implementing it. Another example is our ERP system. We had a lot of sales reps complaining about how it took very long to do certain types of transactions. I said, well, okay, make a recommendation.

I said, we have a blank check. So we have a blank check on ERP enhancements. Go. And the ideas came forward. They were great ideas.

We prioritised them, we implemented most of them, and it just made their jobs faster and easier. I think when we talk about setting these frameworks, you also have to allow that time and space and ability and sometimes incentives for your team members to bring their best ideas forward. And that’s what we did.

Yeah, that sounds, I think I’ve heard that before described as freedom in the framework, whereas the ownership or the leadership know provided the framework. Here’s the framework of how we’re going to operate now within your roles.

You got freedom to operate within that framework and make your own decisions. And it sort of had a nice catchphrase to it. So, Joe, you mentioned that I think you sold the business to a PE about seven years. In how long before that transaction or that deal with the PE company did you start thinking about succession and that you might have to change and adapt your role to enable it to help with the valuation that the PE would bring? How long before the deal did you start thinking about succession, is the question.

It was about a year, because it took a little bit of convincing for getting the other shareholders on board and deciding that, yes, this is the best path forward and we should sell the company. It was about a year.

Okay. And did you have any view or concept of what the valuation of the business might be worth at that time? Or was it just sort of plucking numbers out of the sky and aspirational and hope numbers?

Yeah, we did some homework with m a advisors. We also had an offer from a strategic buyer about a year prior to that, who was a very acquisitive buyer, and they sort of helped us identify what the market is willing to pay for the business. And so we had some really good data points and some real situations that came up that helped us identify what the.

So you have a real big valuation. But the interesting question, the follow up question is that is when you were approached by a strategic buyer earlier, what stopped that deal from going ahead?

Yeah. So it would have been a great fit. So as far as fit and complementary businesses, it was wonderful. There was a lot of synergies as well. And it was actually the other shareholders that held up that deal.

So they wanted to buy the business and keep me on as a shareholder and run the company. And so the other shareholders got really excited about the combination and they didn’t want to sell out. And so that was a sticking point for us. So they got so excited, they didn’t want to sell their shares.

22 by the sounds of it, it is okay. So we’re starting to think about exit and we’re starting to think about, I guess, a future. That future could see you involved for a couple of years as the ongoing leader with, I guess, additional investment in the company. Where did that lead in terms of role and dependence? Were you conscious that they needed you to be part of that future deal because the business was dependent on you?

Or was it they were saying, hey, Joe, you’re the obvious CEO for the role moving forward, just because you’re the best person for the job.

Yeah, it was a ladder. So I spent a lot of time ensuring, and I did this throughout my whole career, which was, and it helped me elevate my career by building teams so that it wasn’t dependent on me. And so when I was building into work over that seven year period, I looked at every functional area, I looked at every point of dependence, and not just the dependence on me necessarily, but also other points of dependence that were embedded inside the organisation. So I made a conscious effort that we needed to build in a way that I could leave for a month and it wouldn’t have a devastating impact on the company or it couldn’t function without me.

And so that was actually a feature that the private equity group really liked because for them, that gives them flexibility. So they chose to keep me on board. They wanted me to continue to lead the company and continue on our path and the vision and mission that we set out because they subscribe to that.

The fact that my role in the company and my leadership style and how I built the operation, that it wasn’t completely dependent on me was actually a perceived reduction in risk on their part and it increased the attractiveness factor. Because if things didn’t work out, if for one reason or another, post close, and it happens a lot, where for whatever reason, the leader, the CEO, is not in alignment with the buying group, then they felt that, I would imagine they felt that, hey, we have some flexibility here. If it doesn’t work out with Joe, well, you know, he built such a great business that we could bring in a different leader and it wouldn’t affect us. And there was a benefit for me in doing it that way as well, because I didn’t have to agree to any long term contracts or erroneous earnouts as part of the deal.

Okay, so we’re talking about earnouts and dependence. A lot of business owners say, look, the business isn’t dependent on me, but in reality it is. So you’re in negotiation. So just imagine back to the point of you’re talking to the PE company and you go, look, the business isn’t dependent on me. How did you demonstrate that? How did you convince them? What evidence did you sort of use to go, look, here’s the reason why the business isn’t dependent on me. Here’s my role, here’s how we work together.

So the real test is when they’re not talking to you, okay, because we’re in selling mode, right? So we’re saying, yeah, the business doesn’t depend on me, doesn’t rely on me. But the true test of that is during due diligence, when they’re asking deeper questions, getting more information, they’re talking to your next layer of the management team.

And that’s where the rubber hits the road as far as whether the business is truly independent of the business owner from the business owner’s perspective, versus the actual test, which is during due diligence. Yeah, I’ve also heard it said in the past, is during due diligence, the business kept growing, the business kept working to plan, while I, the business owner, was able to allocate and dedicate a lot of time to working with the buyers in due diligence. And almost a big portion of their time was working on the due diligence. And the business just kept going to plan. And the feedback was that was the best evidence.

So, Joe, looking back, what would you do differently? I guess. How do you feel about the fact that you’ve sold the business now? Any second thoughts?

Yeah, I don’t have regrets. It was a conscious effort and a decision that I made for various reasons, but I do regret building the business a little bit differently along the way. I would have made some different bets and decisions within the company that were, I would say there were certain windows to do that. For example, I would have doubled down on expanding our geographical footprint. I probably would have bought out the other shareholders first just to sort of have full control over the process and eliminate some of those potential obstacles when you are in the exit process. So I would have done a few things differently, but I have no regrets. We exited. It was a conscious decision. We got a very fair offer.

The only thing I would have done is probably I would have built a little bit differently, maybe made an acquisition or two.

Okay. And I guess that leads us naturally to the what did you learn during that exit process with the first one specifically where you’ve learned some things? And I guess there were some potentially. Well, I didn’t see that coming, or I wasn’t aware that would happen.

The way it is that you were able to apply for the second exit, the second bite of the cherry, so to speak.

Yeah. It’s a couple of interesting learnings. I think the biggest is how extensive and grueling the due diligence process really is. I think just going through that process was eye opening. There was a lot of learnings around that. I think some of the other things that I advocate today is we sort of manage the deal on our own, but I would certainly have an advisor on the next one who can sort of manage some of the dynamics, especially when there’s multiple shareholders involved and deal structuring and whatnot. So definitely had a lot of learning around that. And sometimes it’s also qualifying the buyer. And I think in the first case with the private equity firm, it was a great fit.

I thought there was going to be some great opportunities where they would bring in capital, invest in the business differently, take our vision forward as well. On the second one, which was one that didn’t go through, it was around qualifying the buyer and their intentions. That was certainly another learning experience for me as well. And that was a quite long, drawn out process. And at the end of it, we didn’t have a deal.

Okay. So there’s always a lot of learnings that you include getting advisors involved, and they can act as a bit of a mediary between you and other shareholders or you and the buyers.

And I hear good cop, bad cop and people who’ve sold businesses before, because when we’re running a business and we’re selling our product, it’s different to selling our business. And we might get a bit, have some attachment there as business owners. So a bit of learning there, the due diligence, the amount of thoroughness and depth that you go to in due diligence is another big awareness piece. And I guess a lot of things that we hear from business owners is, if I only knew what to prepare in advance and have ready, because then when the due diligence comes, I can just go, there you go. There you go. There you go. And it would save a lot of time and distractions and momentum during that process. So, Joe, I guess there’s just really one last question that the listeners are waiting for. And that’s out of everything you’ve learned, being the CEO shareholder of the organisation, growing it consistently, getting out of the day to day and working on the business and dedicating a lot of your time to the strategic side of the business, working on the business, leading the growth and making sure that the business isn’t dependent on you or overly dependent on any other single point, and then taking it through to getting PE on board and then ultimately a sale to a strategic advisor, a buyer, rather strategic buyer through that whole cycle. And the story that you’ve shared with us today, what’s the one key message, if you can distill it down to one, but what’s the overall message or theme that you’d like by our listeners to take away from our conversation today?

Yeah, I think we underestimate the impact that business owner dependence has on a company, on its valuation, on its attractiveness, on its growth potential, the ability to scale, and it extends well beyond the business owner. It looks very deeply into your business. So when we talk about business owner dependence, we’re not just talking about the business owner, but all the layers inside the organisation to make it autonomous, to make it resilient and using that as an opportunity for growth planning and scaling. Because at the end of the day, if you can do that and build an owner independent business, the options significantly expand. The attractiveness for your business, for buying your business and working with you, and the perceived risk significantly more favorable to the business owner. So I would say that’s the one thing I would want listeners to take away today.

So just beware. Too much dependence on the owner and by extension too much dependence on a supplier or even a client, I guess that applies to as well. Joe Graci thanked you for sharing your exit insights with us today. I’ve learned a lot and appreciate you joining us.

Thanks, sir. I appreciate you having me.

Great stuff.

.About Joe Graci

Joe Graci is a Business Builder & Advisor in the technology industry and has led multiple exits through private equity and strategic buyers over the past 15 years. After leading his North American cybersecurity software distribution company to 9 consecutive years of growth with revenue topping $100M, Joe successfully exited to private equity and subsequently led the PE fund’s exit to a strategic buyer 2 years later. Through his investment company, JOVA Ventures, Joe is incubating Metal Networks, an AI-enabled product translation & quote automation engine for industrial supply chains. During Joe’s journey from scaling to exits, he realised how critical it was to eliminate the Business Owner dependency factor from the business. Joe was able to scale his company and negotiate better terms as a result of his experience. Joe enjoys sharing his story and providing business owners with the tools, strategies & mindset to scale their SMB, mitigate risks and create a more marketable business at the point of exit.

Joe also serves as a mentor for several technology Accelerator programs including the Rogers Cybersecurtiy Catalyst Program, Venture Labs and the Innovation Factory.

On his free time, Joe enjoys exploring the world of wine and navigating the perpetual learning opportunities it offers. Joe is married with two children and lives in Toronto, Canada. Through his personal family experiences, Joe developed an interest in his personal family experiences. Joe developed an interest in supporting organisations that cater to enabling special needs children with the education, tools, and resources they need to learn & grow.

If you would like to learn more about how to start preparing your business, then you can get more information here: It All Begins with Insights.

Darryl Bates-Brownsword

Darryl Bates-Brownsword

CEO | Succession Plus UK

Darryl is a dynamic, driven Business Mentor and Coach with over 20 years of experience and passion for creating successful outcomes for founder-led businesses. He is a great connector, team builder, problem solver, and inspirer – showing the way through complexity to simplicity.

He has built 2 international multi-million turnover businesses; one now operating in 16 countries. His quick and analytical approach cuts through to the core issues quickly and identifying the context. He challenges the status quo and gets consistent, repeatable and reliable business results.

Originating in Australia, Darryl’s first career was as an Engineer in the Power Industry. Building businesses bought him to the UK in 2003 where he quickly developed a reputation for combining systems thinking with great creativity to get results in challenging situations.

A keen competitive cyclist, he also has a B Eng (Mech) Engineering and an MBA.