Episode Transcript
The Finance Ghost: Welcome to episode two of the Maximus podcast.
We had such a good time in episode one, learning all about the backstory to Maximus Corporation and what Jan Van Niekerk and his partners have been building. It's a really interesting portfolio, it's a great way of thinking, and it's certainly a commitment to doing business the right way in South Africa: all of which I think is fantastic, of course.
Jan, you are back for episode two, and I think we'll start to dig down into some of the other people in the organisation in episodes to come. So, I'm looking forward to hearing from them.
But for now, we're going to talk about how good leaders build good businesses. And obviously, that is the perfect precursor to us then actually meeting a few of these people in the broader Maximus group.
So welcome to episode two of this podcast and, as always, I’m looking forward to getting your insights here, Jan.
Let's jump into the concept of leadership then, because of course it's this big umbrella term, right? And it's inspired so many books, so many conferences, talks. Some of which are real, some of which may be more on the grifting end of the spectrum, let's be honest.
But at the end of the day, leadership really is what makes or breaks a business. And I think that's the reality. It's really only as good as the people actually driving the thing.
So, from your perspective, just how important is it for leaders to actually drive an appropriate culture?
Because that's another one of those words where people just say it; they say “culture”. We hear about it, but do we actually know what it means in a business and how important it truly is?
Jan Van Niekerk: Some of the things we've learned is that culture is not what you write on the wall and hope you get there. Culture exists already, whether you like it or not.
You can just write down the way that people in your organisation behave. If they are always honest in their dealings, that's your culture. If they're dishonest in their dealings, that's also your culture.
You might want your culture to be different, but you have a culture already; and most of the time the culture is set from the top. The way leaders behave or your leadership team behaves, is a very strong indicator to the rest of the business on how they should behave. And then you can have the collective behaviour, and that's your culture.
So, if we frame it that way, then culture is incredibly important in a business, in the way you run it in South Africa. And the leadership team are the ones who set the culture. The way they interact with each other, the way they interact with their suppliers or with your customers, the way you interact with the receiver of revenue, for instance, that's part of your culture.
We think culture leadership is very important, and therefore we have to set the right culture. And that's what we're trying to do at Maximus, is the proper engagement with my leadership team, in running their underlying businesses.
And part of our culture is that we have a culture of independent responsibility, but with consequences. We do not meddle in the way people run their own businesses. We are there to support.
Our culture is to be a supportive partner in the business rather than a boss or an instructor. Those are all examples of how culture gets set, and that then permeates through the organisation.
The Finance Ghost: So, what it sounds like you're saying there, Jan, is that culture is quite sticky. I love that point of how culture is what you have already. If you write down the culture you have today, then it's accurate. And if you write down stuff that you're not actually doing every day, then unfortunately that culture statement is just nonsense, really. I think that does make absolute sense.
And I guess it also means that changing a culture is not easy, right? That's why it's just so important to have the right one.
And that's something you spoke about in episode one. You invest in people. You look for people who are there for a long time. You look for leadership continuity.
Because if you just parachute in a new leader, then culture doesn't just change overnight, right?
Jan Van Niekerk: The tough bit is that to change culture with an existing team is very difficult if there's a big change in culture, when you add new leaders.
Most of the time what happens is the people get replaced, to change the culture. And you can have a process where you deliberately change people around the leaders to change the culture. Or if a new leader has a different culture from the business, normally the culture overrides, and kills the culture of the individual coming in.
So, to go into any new business and think you will change the culture; that's a very difficult task.
The Finance Ghost: Absolutely. And I know you've got lots of experience dealing with that as well. But certainly, an area where I know you have plenty of experience too, is in helping leaders in an organisation make other executive appointments. Plugging some of their blind spots along the way, building a team around them, that helps to drive the culture.
Because there's just no way that one person can do it, obviously - it's too hard. There's too much work to do. You require a network of people operating all the way down the organisation, to scale.
So, from your perspective, what is the right way for leaders to go about dealing with these blind spots and then just bringing in other executive skills that specifically address those gaps in the business?
Jan Van Niekerk: The first part is, as a leader, you need to know who you are, and you need to know what kind of leadership style you have.
Some leaders are technical leaders. So, they’re, for instance, someone that runs an engineering business, so their leadership comes from the technical expertise. And they need help in finance and marketing.
Someone, for instance, who is a typical marketing CEO, marketing leader: they like to be out with clients, but they need help on finance and operations, et cetera.
So, you need to know what the areas are that you are good at, and where someone else can help you. So that's the technical bit.
The second one is you need to know what kind of people you want to appoint. Do you run your business a bit like friends and family, and you want everybody to be happy together? Or do you run your business slightly more professionally, where you say, we are good colleagues at the office, but we don't have to spend every weekend together around the braai?
And that's a specific choice you have to make because it determines which kind of personalities you bring into your business.
Over the years, we have learned that personality assessments can be useful, and there are various ones available. We make use of very specific tests which have worked for us over the years.
So, it does help to have a balance in personalities in your executive team. But those personalities don't speak about people's inherent ethics. So, we believe that you first have to check the ethics of people before you go and check all the other personality skills.
And then the other bit I will say is, we try and look for emotionally healthy individuals, people that are comfortable in their relationships, that are comfortable in their personal relationships, and therefore people that are comfortable to work hard, but also have a balanced lifestyle.
For instance, in the broader group, we like people that have specific interests outside of just their work. Whether you're a mountaineer, or you like horses, or whether you ride a motorbike or you like fishing, people have to have outside hobbies, because otherwise they will burn out inside of their business.
The Finance Ghost: Yup. And then they'll take others with them, right? We've all worked with or for someone whose entire life is their work. And unfortunately, they then demand that from everyone around them. And it tends to end quite badly for everyone involved.
The other thing you've brought up there, which I think is a great point, is the need to have a proper system in place. Like you mentioned, there are personality tests, for example. So, you're not just hiring based on vibes. It's just too subjective, right? To have a couple of interviews with someone and then you say, “Well, now I feel like I know this person”.
Actually, the way you feel about them is going to be as much a function of your mood on the day, as it is of that person. So, any kind of systems in the space just really let you adjust for these sorts of biases, right?
Jan Van Niekerk: That's absolutely true. And then also to have a few more eyes in the interview, to have different people doing that. But the systematic part helps a lot.
I think the last bit is not to be over-anxious. It's very unlikely that the first person that you meet and interview will be the right candidate. Therefore, don't be too anxious, and appoint slowly.
The other point is you need to figure out how these people's incentives and desires work. So, some people want to have ownership in a business, other people do not really require that. Their personal circumstances don’t allow or require for it. And it's important to understand what their wishes are.
And, as a leader or owner of a business, whether you are prepared to give up ownership in your business, or whether you are looking for people that only need to be, or can only be, employees in the business, because all of that needs to be aligned.
We are a big believer that relationships carry on the way you start them. And therefore, you must have honest conversations early on. And you need to be clear about what the incentives are, how the structures work, what the working environment is, what the team is you're going to work with.
If you're dishonest or you try to paint too glowing a picture upfront, you tend to lose very good people just because you were not clear upfront.
The Finance Ghost: Again, excellent insights coming through there.
And then perhaps let’s focus specifically on entrepreneurs, because this is something we come across all the time in the market, right?
If someone has built up a business to the point where they have staff around them, but those staff are perhaps just managers at best. Not necessarily people who can make executive strategic-level decisions and be that safe pair of hands. In reality, that's a rare skill set. It really is.
So, what tips do you have then, other than the ones you've already given there around alignment, using systems, et cetera? What tips would you specifically give entrepreneurs, Jan? Especially those looking to bring in their first or second executive appointment early in that journey?
Because I think that is a terrifying line to cross for an entrepreneur, especially because such people obviously do earn a lot of money. It's a big overhead to bring into a business.
It's also another big personality who will have views and opinions, which is exactly why you're hiring them in the first place. It's a “crossing the Rubicon” moment in so many ways, isn't it?
Jan Van Niekerk: The first point I would make is, the fact that you are bringing in someone else does not mean that you value your existing employees and partners less. You shouldn't see that another person diminishes the role of the existing team.
All of us grow with a business to a point where sometimes the businesses grow beyond our own capabilities. And that's a fact of life. And when you have to tell your colleagues, “Guys, we've gone beyond that”, there's a right way to have that conversation.
Then, in terms of appointing the next person to come and join you in the business, you hear it all the time: your first outside appointment is the biggest because they will help you appoint all the other people.
When you're a small team and it's entrepreneurial, then personal relationships and chemistry is important. Because in the early days, or the early-ish days of a business, there will be late nights, there will be pressure, there will be tension. And the ability to have a relationship where you can resolve issues is important.
And that would be the other bit, is you need to have a mechanism in which you can resolve disagreements. And that mechanism cannot only be compromise on the side of one person. Healthy relationships need that mechanism.
The mechanism could be, “Listen, we disagree. Let's take a day off, think about it and come back. Let's get a mentor to come and help us think through it.”
But you have to have a concrete mechanism to resolve disagreements, otherwise you're bound for explosions in the business. So that would be some of the relationship help you should get.
The other one is mostly for those appointments, one would go into your own network - people you know, people you trust, because it's unlikely that you have a big network at that stage to go and source skills that might come from other places. That's probably a few years down the line.
The Finance Ghost: And Jan, in your experience investing in a whole bunch of different businesses, would it be fair to say that not all entrepreneurs are - I don't want to say the word “coachable” because it almost sounds condescending, and I don't mean it in a condescending way - but I'm the first to admit, as an entrepreneur myself, there's so many things in my teeny tiny business in the greater scheme of things that I don't have to deal with. Stuff like bringing in executive help, et cetera.
And there are some fantastic entrepreneurs out there who have developed excellent products and services. They run cool little businesses, but they are still little businesses.
That's what I'm talking about when I say coachable. People who are ready to actually take that next step, take on all the additional risk of scaling a business, bringing in executive skills.
And that unfortunately can impact the investability, right? It impacts the ability of those entrepreneurs to scale their businesses, sell the thing one day for a nice big number. Would that be a fair assessment, that some entrepreneurs are just not really going to take that leap?
Jan Van Niekerk: I think it's a fair assessment and it's their prerogative. Every entrepreneur has done something in society that means other people will write a cheque to pay them for their service or their product.
Not all of those businesses need to get outside capital or outside shareholding. It's fine to run your business the way you want and to grow it. That's where we get the interaction with entrepreneurs, is sometimes they require capital and they think it is needed for one area, where actually the capital should be going to someone else.
So, we believe entrepreneurs solve problems with ingenuity and you only use capital from the outside to grow your business. If you find yourself in a position where you need to make payroll and you need to sell a piece of your business to get cash for that, then your ingenuity in the business has gone wrong. Capital injection will not solve the long-term problem of the business.
And therefore, it also means that sometimes people, when they figure out what the conditions are (that come with an investment or a cheque or an outside partner), they just figure out that that's not the way they want to run their business.
So, you're absolutely right. There are many entrepreneurs that run great businesses, but they should not have outside partners in their business.
The Finance Ghost: The other problem, of course, being that a capital injection has this incredible ability of just taking a small problem and then turning it into a big one. If the foundation's not right, if the right leadership is not in place, then it's a problem.
If you can't afford a mortgage and you don't know how to run your personal finances, then someone giving you a bigger mortgage for a bigger house is just making a bigger problem. It's certainly not solving anything, is it?
Jan Van Niekerk: That's exactly the right reason. And what we find many times in our conversations with entrepreneurs, sometimes it's just a bit of advice, or putting them in touch with someone else that has been in the same position. And they solve their own problems.
And in that case, we're really happy, because if someone can run their business better, even if we have no financial interest in that, they’re just the ecosystem and they make the country better anyway.
The Finance Ghost: So, let's maybe talk about from an investment perspective. We've touched on capital injections; we've talked about the importance of leadership and everything else.
And if you bring it all together, it takes us into a natural progression of this conversation, into what that means as an investor. How you would look at leadership, how you place value on it, what you just look out for.
So, from an investment perspective, when you're looking at a company and you're thinking about the cash flows and you're doing the due diligence and all the work, what sort of weighting do you put on the people around the table in that organisation? And how do you actually make that assessment?
Is it the most important one, to look at the people?
Jan Van Niekerk: The process for us is, the first calculation is we just do a fairly simple analysis to decide whether it's a good underlying business anyway, because otherwise there is no conversation to be had. And that's not a complicated calculation to do.
So, once we have established that the business can grow and has the potential to reinvest capital into its own operations over time, then the second most important conversation is with the people running the business.
Now, there are two options. The one is you buy a partnership stake in the business, and we become a partner with the operating team. And therefore, it’s important, that we have chemistry, that they are good leaders, that we agree on how you appoint other people, we agree on how we resolve our disagreements.
So there, the leadership and the quality of the people is important. We also have chosen to do business with people that we respect them and they respect us. So, we have a respectful relationship. It is not only a financial transaction.
There are many places where you can have a financial transaction, and I think private equity investments, for instance, is one of the areas where that is doable. Mezzanine finance is one where that's doable. But for the partnership investor, the way we are, we like to have good personal relationships with people that want to be part of the group. So that is a very important thing.
The other option is, we look to buy the entire business and then we have to replace leadership. And in that instance, it's much more important. On the one hand, we can bring in our own leadership team, mostly people that we know already and have been running businesses with.
But that is mostly very difficult to achieve; to bring an entire new management team and the leadership team into a new business. So, we've only done one or two of those. It's easier to rather partner with someone that runs a business already.
The Finance Ghost: So that's what I wanted to ask there, as you were alluding to those points, is: for people who are perhaps thinking about, okay, how do I sell my business one day, how do I exit the stake? How do I crystallise this value?
I guess if you're hoping to just run to the point where you're about to fall over because you're so burnt out, completely tired of the thing, you're hoping that someone's going to just sail in and give you this wonderful Hail Mary offer and take all your problems away with no earn-outs and nothing else.... Sadly, that's pretty unrealistic, right?
With all of my corporate finance experience and certainly all of your deal-making experience, Jan, you won't see that every day. And chances are good that as an entrepreneur, if you do find someone willing to pay you a big multiple and just let you disappear, an actual deal unicorn, you should really just take that money and run away as quickly as humanly possible, right?
It's the deal of the century. Because in practice, investors like you are looking for a handover period, earn-outs, some guarantees that what the person says you are buying is what you are actually buying.
That there's this handover from a leadership perspective and that the culture just carries on. As you referenced earlier, it's very hard to fix a culture and it's really difficult if it gets lost. This is important stuff for entrepreneurs to think about, as they are planning their exit, right?
Jan Van Niekerk: Mostly when entrepreneurs want to sell a piece of their business, the first thing they want to do is to get away from the personal sureties they've signed to their funders over the years.
And it might sound like a funny thing, but it's a big thing. You speak to most entrepreneurs, the one thing that keeps them up at night is that they've signed away their house or their life savings to give surety to the bank to lend the money to run their operations.
Secondly, perhaps from our side, if we have to have agreements where there's guarantees and earn-outs, then we have done the assessment the wrong way or we're dealing with the wrong people. At Maximus, we try to do fairly simple, straightforward transactions.
As an entrepreneur, if you want to sell your business at some stage to someone else, there are three types of buyers.
The person that can pay you the highest price for your business would be a trade buyer, someone else in your industry, because they can take your product and your service and your clients, add it onto their platform. They can fire all your staff, they can get rid of your properties and your branding, and all of that profit falls through onto their bottom line, so they can afford to pay the most for you.
And if you don't care about your people and your legacy and your brand and you just want the highest cheque, that's the way you should go.
The people that can afford to pay the second highest is typically private equity, a temporary investor - someone that buys now and they have to sell sometime in the next seven to 10 years. They still need to keep you and your team in place.
But typically, they would put a lot of debt into the business, give you an incentive to pay down the debt. Under-invest in your properties. Under-invest in research and development. Under-invest in growing your team so that they can show better profits over five years and sell it at a multiple to someone else. And then, typically, you will sell with that private equity investor.
And then someone like us, that's a partnership investor, will pay less than anybody else. We won't be able to afford all the price because we look to keep management, whether it's the entrepreneur or their next management team, in place. They need to be remunerated appropriately.
We will keep on investing in research and development, marketing and the infrastructure. And we will be looking to make money with the team over time and help them to diversify the risk in their business to the point that they don't have to sell the entire business. Their family can keep on owning a piece of the business.
Those are the options for entrepreneurs to think about: what are the types of sellers? What is it that I want from my business? And that will determine where you do a transaction.
The Finance Ghost: Another important point for you as an investor is just how severely a bad team can actually ruin a business. We've seen many examples of this out there, but people are not always familiar with how even big companies can go wrong. And certainly, small companies can go wrong as well if the wrong people are in charge.
So perhaps just walk us through the extent to which you believe that if you hand a great business to a bad management team, it can still really go wrong.
Jan Van Niekerk: So, examples of what can happen are: if you have a team where team politics plays a big role, that means that your senior people spend an inordinate amount of their time engaged in team politics and conversations outside of the boardroom and the operations, et cetera. That takes your eye off the ball from operations and most likely from other opportunities.
If you have dishonest people in your finance department: they don't submit tax the right way to the receiver, or they don't make payments to suppliers as and when they need to do that, that can trip you up in a big way. Normally, these things only come out in an inopportune time.
When you have people that don't understand the link between an income statement and a balance sheet, and they want to buy property just for the sake of what the thing looks like (so there's a glamour element to that), then you can have very bad capital allocation in the business.
And if they are unhealthy leaders, where they have the penchant to bully their subordinates or their colleagues, where they are selfish in terms of bonuses, the list of bad leaders and the consequences is quite long.
And many of these things don't become apparent quickly. Some do, but not all of them. And they take time to come in.
And what that means is, the type of people you then are able to employ in your business will carry on doing the bad stuff over time. And that is how even a good business gets broken.
The Finance Ghost: Absolutely. And then conversely, there's that wonderful quote (I think it's Buffett, but it certainly came out of the Berkshire stable) about how if a great manager goes into a bad business, then it's the business's reputation that stays intact.
I'm obviously paraphrasing here, but in other words, if you send great people into a bad enough place and it proves to just be too difficult to turn around, then it almost doesn't matter who you sent, they're probably still not going to get this right.
So, let's maybe just spend a couple of minutes on that as we start to bring this podcast home. Because it really does just cement the point that you raised earlier that it doesn't actually help to go and understand the leadership team if the underlying business is bad.
But of course, if that was an easy assessment to make and to say, well, this is a terrible business, then no one would ever make any investment mistakes, right? It would all be too easy. Unfortunately, it's not quite that simple, is it?
Jan Van Niekerk: It's not quite that simple, but you have to understand what are the levers that a new management team can pull in an existing business to improve the quality of the business?
Most of the time they can either do something that improves their pricing, so they can make better margins. That could be doing work on brand or cutting costs in your manufacturing, etcetera. Or they can do stuff in terms of lowering the cost of capital (which is the balance sheet angle of things), or they can work on stock turn, or they can cut costs when it comes to staff, et cetera.
But fundamentally, most businesses have a standard set of economics which society has allowed them. If you're a grocery retailer, you make 7% operating margins. If you're an import distributor, the world will allow you 19% to 20% gross margins. If you're a telecoms company, you'll have 53% to 60% gross margins because you're capital-intensive.
There are certain ways in which the economics of these businesses are set up, and great leaders can move those a little bit, but it's very unlikely that they can transform a mediocre set of economics in any economy, to fantastically great ones.
When you see those things happen, or when we see success portrayed in a bad business, most of the time it's balance sheet shenanigans (where people are borrowing money or hiding stuff on the balance sheet), and those things come back to bite you at some stage in future.
So fundamentally we make sure that we understand the economics of the underlying business first, and we'd rather help a great management team get in charge of a great business. That's just the best outcome for everybody.
The Finance Ghost: Thank you so much, Jan. I think we've covered a lot of ground here. Some great insights into what you look for in a management team, just how important this stuff is. And not forgetting that the underlying business still needs to work regardless of the people involved. This is the stuff that ultimately drives success in investing and in business.
I know it's a particular passion point of yours, and I certainly look forward to getting some of the other voices in the organisation onto this podcast. I know you've got plenty of great people around you and I look forward to bringing that experience here. So thank you once again for your time on this one.
To the listeners, I would encourage you to go back and listen to episode one, where you'll learn more about the backstory to Maximus, what's in the portfolio, and how Jan really thinks about the world, and then check out the remaining podcasts as they become available. No doubt there will be plenty of insights there.
So, Jan, thank you so much for your time.
Jan Van Niekerk: Thank you very much.
