How To Improve Any Business—When You’re Not an Industry Expert

If you’re a budding acquisition entrepreneur looking to take the reins of a company and drive your own destiny, it is natural to look at industries similar to the one you are in, or those with which you are most familiar. But consider expanding your acquisition palette to include businesses in less familiar industries where you could add your unique skill set and then drive enhanced performance going forward.  

In the realm of entrepreneurship, possessing a sense of innocence or naivety can be a valuable asset, as it allows you to approach the unknown without preconceived notions about what can or cannot be achieved. Embracing uncertainty and not knowing what awaits at every turn can actually work to your advantage, compelling you to explore uncharted territories that you might otherwise overlook. In addition, you will be forced to work on the business rather than in the business, a perennial problem for many entrepreneurs.  

This article will walk you through the process to evaluate and improve businesses where you are not an industry expert, and show you how your lack of experience can be a strength.

Start With Research

If you have found a business that meets your qualifications for profitability, growth, lifestyle and other criteria but you may not be fully comfortable with the industry or space that it is in, it is critical you begin your research early and develop your investment thesis.

Research Total Market, Customers, and Costs

Market research should start broad to gain an understanding of the total market and then get progressively narrower. How narrow depends on the type of business. For example, if you are looking at purchasing a real estate business, demand is highly correlated with mortgage rates. Do you see mortgage rates trending up, down or sideways in the short- to medium-term? Why or why not and how would that affect the business? Local demographic trends, such as new homes, may also be relevant. The end goal in performing market research is to identify what drives demand. 

Now that you have an idea of the overall market outlook and where it is trending, start diving into how the customers in the market are served. Are customers being serviced at various levels? For example, is there a low-cost provider that does the minimum and services customers who are more cost-conscious? An example of this would be consumers that use the online kitchen design tool on Home Depot’s website to design their kitchens and install them themselves. Alternatively, are there providers that are tailored toward a more discerning customer that demand greater service but pay a higher price? An example of this would be a custom kitchen and design center who have trained employees who can help a customer design the kitchen or bath of their dreams. Another alternative: Are products or services homogeneous and is customer value driven by some other measure such as location, proximity, or assortment? The best example of this would be liquid concrete. Concrete can only be made and transported within a certain distance of where it will be poured. There are variances as to the type and quality of concrete needed, but customers of liquid concrete need providers within a certain geographic location from their project.

Your next step is to determine the cost of serving customers at each of the levels identified. Each has a different cost structure, price point and profit margin. At what level does the target business play? Is there an opportunity to move upstream or downstream? What about a completely new category focused on a cost-conscious consumer who still wants a high level of service? If you went after that market, what would need to change within the target business to make it work?

Where To Look

To find the above information a great place to start is trade associations and publications. Every industry has them, along with periodic events that highlight vendors, innovative technology, and training. If you have time, attend one of the events. Check out their website and see if you can buy a membership. The websites of many of these associations are chock-full of valuable information that will aid in your research. 

Another often overlooked resource is your local library. If you do not have a library card, get one. Start with their online resources and see what you can find. Your local library subscribes to  many information resources that have industry publications for free, including lists of existing business and even free stock research. 

If there are publicly traded companies within an industry you are researching, look up their annual reports and review their investor website for presentations. There is a wealth of information that public companies must disclose about the industry and markets they compete in.  

Develop an Investment Thesis

This is the fun part where you get to be an outsider looking in. What do you see happening in the market and the business? Is consumer demand shifting and is there an opportunity to service customers in a new way? Are there untapped markets that have yet to be fully exploited? Is automation changing the way the market is being served? What can you take advantage of? What can you apply from your own experience in whatever industry you were in previously that may work in this industry?

In developing your investment thesis, you have the benefit of not being constrained by expertise yet. This is a chance for you to see things that others may have overlooked. Take that knowledge you have acquired from looking at things from the outside and create an investment thesis based on this research. 

Come Up With a Value-Creation Plan

Shift your attention away from the macro-level external environment and focus your attention on the target business itself. Given your investment thesis, what will need to change within your target business? This is frequently referred to as a value-creation plan. 

You should start to develop the value-creation plan before the transaction closes, but it will be refined post-closing after you have had a chance to interview current employees and assess the position of the business. Start by assessing the business's strengths, weaknesses, opportunities, and threats (SWOT) by looking at its financial performance, customer feedback, and employee feedback. What is this particular business really good at and what can be improved? It may be best to open a Word document, create a heading for each area of the SWOT and start bullet pointing under each heading as you dig deeper. 

Start by looking at trends in revenue by service/product line. In what direction are sales trending and why? Is there seasonality that needs to be considered? Is there any customer feedback you can access? Even better, is there a net promoter score?

Consider whether there are any stand-out employees. Frequently, you will find one or two employees that excel at their jobs and produce raving fans as customers. When you find them, do not necessarily promote them, instead, create a process in which you can duplicate their success with others in the business.  

Look at the income statement and assess the cost-of-goods-sold and cost-of-service-provided. Is the gross profit margin consistent all year? Is it going up or going down? Why? Then look at everything below the gross margin. Are there expenses that do not need to be there? Is SG&A as a percentage of revenue going down as revenue increases? If not, why? Move to the balance sheet/fixed assets. If it is a very fixed-asset-heavy business, what is the condition of the property, plant, and equipment? Is it new or old and was it maintained? 

Finally, look at the culture of the business. Culture is a very ambiguous term, but you can assess culture by walking around and talking to people. Are employees happy or do they feel they are just there to punch a clock? Is there a feeling that current management values them? If so, why? This management-by-walking-around helps to get people comfortable with you and helps them feel as if they can reach out to you directly with their concerns and their accomplishments. 

After performing the above, you should have a robust SWOT analysis to work with and a list of action items to improve business performance. This list is your value-creation plan. 

Setting Goals and Making a Plan

You should now have a value-creation plan, but you need to set goals and make a plan to achieve them. At this point you should have done extensive research on the industry and business. You should be in a good position to start planning. This process should be broken up into long-term and short-term plans. 

The actions in your value-creation plan should be executed in an expeditious time frame. These will be the backbone of where you want to take the business in the future. At most, you want as many of those actions completed within 12 months of the closing date. Incorporate these actions into a target monthly budget. 

The value-creation plan will most likely take you most of the first year to accomplish, but it will be time well spent. At the same time, you need to leverage your newfound knowledge based on your research and envision where you want the business to be five years from now. What are the revenue and profitability goals you want to achieve by the end of the fifth year? From there, work your way back by quarter for years 3-5 and then monthly for years 1-2. Reconcile the 12-month target budget you created in support of the value-creation plan with the five-year forecast. Does it make sense? If not, what needs to be changed on either? Enlist outside help as needed.  

Doing all of the above creates short-term, intermediate and long-term goals you can share with the staff so that the entire business can now work toward those goals. Goals and planning give people purpose. It helps them know what is expected of them and can be communicated down to the lowest level. It will also help you with performance bonuses if that is common in the business you are purchasing.  

Never underestimate the power of simply communicating a goal. People want to be good at their jobs and achieve success compared to a benchmark, competitor, or market. It helps morale and puts you ahead of many other businesses that don’t.  

Executing the Plan and Measuring Results

You have a short-term and long-term plan and goals to achieve; now what? As the great management theorist Peter Drucker once said, “What gets measured gets improved.” 

Develop a list of business-wide key performance indicators (KPIs). There should be no more than five to seven KPIs. Each of the KPIs should track directly to a goal. For example, if a goal is to get to $100MM in revenue by the end of year 5, there should be a KPI that tracks revenue growth to measure progress towards that goal. 

Put together a monthly financial review of the business that includes variance analysis of actuals against plan, a KPI dashboard, and a 13-week cash flow. Analyze these reports and decide what actions, if any, should be taken to meet your business goals. At least once a year, go through the same process again. It will be much faster next time since you will already have been in the industry and working in the business. Revise goals and plans accordingly based on past performance and future expectations.

Conclusion

The aim of business in a capitalist society is to sell something (good or service) for more than it costs to produce it. Done consistently over time while growing the number of clients served leads to greater economic value. Creating economic value increases the return to investors (you) by increasing total enterprise value over time. 

Following the above process, anyone can work to improve a business and reap the economic benefit that it provides over time.