Genius is in the details that other people skim.
Answer me honestly. When’s the last time you bothered to read beyond the first line of a Terms and Conditions agreement or take the time to pick over a product description before you schlepped a purchase to the cashier? If I had to guess, I’d say your answer probably falls somewhere in the range of “it’s been a few years” to “never.”
Don’t beat yourself up about it; most people would probably say the same. As humans, we have a terrible habit of making long-lasting decisions based on split-second judgments. Our tendency towards assumption is a personal shortcoming that also poses an unparalleled opportunity for turning a profit — provided, of course, that you can see the minute, meaningful details that most people overlook.
I’ll give you an example. A while back, I was sitting around a dinner table with a few friends when the host, a contractor who specialized in home remodels, mentioned that he was looking to sell his business and wondered how much he could reasonably get from the sale. After the meal, we talked through the numbers, considering what the company did and how it worked. The valuation he’d crunched was reasonable but, to my eye, could be better.
Thoughtful, I asked to see his vans. He took me to the garage and opened one of the vehicle’s doors.
“Okay,” I said, surveying the overflowing racks of tools and gear. “There’s more you can do with this. If you had OCD, what would this van look like? It would be pristine. The extension cords would be coiled up on hooks, the racks would be in pristine order, and everything would be in its place. If you do that with your vans and let the buyer see, you won’t have to worry about getting a higher valuation.”
That small change — a few days’ work — netted him a whopping $4 million more than his original (and perfectly reasonable) asking price when the business sold. Why? The answer stems down to two simple truths: more attention to detail equals higher valuation, and how well you do one thing is how well you do everything.
The contractor received a significantly higher sale price on his business after a simple reorganization because the buyer saw the impeccability of his vans and thought, “If this is what the vans are like, his business must be equally well-oriented for success.”
It sounds simple, but you would be surprised at how much sway someone’s subconscious, “First impression” has in transactional conversations. Psychological research conducted on venture capitalists’ perceptions of entrepreneurs and their businesses reflects this. In 2017, a team of researchers found that when investors had a positive first impression of an entrepreneur’s competence and confidence, they tended to view that founder’s venture as having a higher underlying value and were more likely to make an investment offer.
If you can pick up on such small (but consequential) features and optimize them before going to market, you can vastly boost your chances of achieving a high valuation. But, as an investor, you can flip that golden rule — more attention to detail equals higher valuation — on its head to net a lower price on an acquisition.
Point in case: Silicon Valley startups.
I’m going to let you in on the secret — every newbie tech company’s code sucks. It might not be too polite to say, but it’s true; when tech company founders race to get their product to market, they often set documentation to the side and assume they’ll get to it after their launch, or their revision, or their upgrade, or the Tricentennial. And that decision can be a critical mistake.
A few years ago, I was in negotiations to buy a technology company for $5 million. The price was in line with market expectations; I could have reasonably paid the sticker price and felt satisfied with it. But because I knew that tech companies often have subpar code, I brought in a team of forensic programmers and asked them to put together a 200-page report on why the company’s code sucked.
They did — and shortly thereafter, I was able to sit in the negotiation room, drop the binder on the table, and tell them that I could only give them four million because I would need to spend at least a million to fix their code. The CEO and investors were shocked, but there was nothing they could do but agree, not when I had found their worst secret and written it out in painstaking detail.
You only get one chance to nail the nitty-gritty details. If you miss it, you lose your opportunity to show investors that you deserve the valuation you want — and leave yourself vulnerable to quality-checking strategies like the above.
Let me tell you how I approach tech company sales.
If I’m selling a business that is worth $5 million, I’m going to put it on the market for $7 million — and before I do, I’m going to document the code so even a layperson could understand it. Every module has a summary linked to illustrative screenshots, a screencast of the end-user’s experience, and an audio recording of the end-user discussing the program with the developer.
When potential buyers bring their forensic teams in to look at my company’s code, they’re invariably shocked. They think, “Look at this thing. If he did this, I can’t begin to imagine how good everything else is.”
That’s how you earn an excellent first impression and make your top-tier valuation unassailable. Most people don’t take the time or put in the effort to address the nitty-gritty details when they can skim, assume, and achieve average results. But that lack of care poses an opportunity cost that often, in the case of business valuation, tolls in the millions of dollars.
Genius is in the details that other people skim. Don’t let a moment of impatience stop you from achieving brilliance in business.