Sophisticated Systems Inc. Founder Dwight Smith launched the business in 1990, ran it for 33 years, then sold it in February 2023.
Because he felt he had a wonderful team, the acquisition was in large part about finding a good place for his employees. Having acquired a couple of companies, Smith says the buyer’s culture meant everything.
“We've acquired companies where the culture was a fit, and also when it wasn't,” he said at last year’s Columbus Smart Business Dealmakers Conference. “But when we went to sell organizations, the No. 1 thing that I thought about was culture. Is it a good culture fit? We all get calls all the time: ‘We want to sell your business, and oh, by the way, this is what it's worth.’ And I say how do you know what it's worth when you haven't even seen our financials? But at the end of the day, if you don't pass the test that it's a culture fit, it will be an absolute disaster.”
He said he really liked the company that he sold to, and spent a lot of time talking to them about their culture, their values, finding that they mirrored those of his company.
“That was the first step and the first question that needed to be answered before we got to any conversation about valuation in dollars,” he says.
A large part of the company’s value is its customers. He says when he started the company, he decided not to apply for certification programs available to minority-owned businesses because if the certification is lost, that can create issues.
“The company that bought us is not minority owned, they are private-equity backed,” he says. “And when we had the conversation, they looked at our revenue stream, and they said, ‘How much of this business will go away if you're not the owner?’ And when they looked at it and cut our P&L, it was less than 5 percent. So, it had no impact on the business. But that was a conscious decision.”
He says those who run minority or woman-certified businesses should think about their value and their relationships in the context of an exit.
“It opened the door for us to a much wider pool because we were not relying on certification. I'm not saying it's bad. It just was a path we decided not to walk. And it paid us well in the end.”
Among the questions he asked the acquiring firm, after questions about culture, included how they would take care of the company’s clients.
“Because we spent 33 years talking about how much we cared about our client, why wouldn’t we find an organization that could do more for our clients tomorrow than we could do yesterday?” Smith says. “So, if you really love the clients, you got to do this.”
Another line of questioning was around the community.
“Will you be good to our community? If you're good to our clients and employees and our community, and you got a great culture, then we can figure out what number falls out.”
He says anyone that couldn't check those boxes, they didn't need to have a conversation.
On the personal side, he says hiring good people and then letting them do what they do allowed him to step back from the business. That gave him a lot of flexibility to do some things that he loved.
“I never got confused about the business and myself,” Smith says.” I separated the two of them. I talked to so many entrepreneurs and I'll say how are you doing? And they say, ‘Business is good.’ And I don't understand that answer. So, at the end of the day, I had this wonderful life outside of the business. So, it was a fairly easy decision to get to let go of that part of my life so that I could continue on the journey, because I was running a parallel path for a long time.”
When it came to financial planning, he says it's really important to take some money out of the business so that the founder is not relying on the transaction to pay for life after business.
“Our financial planner had told us that regardless of the exit amount, we would be very comfortable,” he says. “So, as you create wealth along the way, take it out and diversify. That takes a lot of pressure off of you so that you don't have to maximize the exit.”
