Partner Gerry O’Reilly continues his informative series of e-zines aimed at helping you increase the value of your business. These regular emails discuss a range of topics and learnings from business-owners who, through applying some simple principles, have achieved lasting value for themselves and their businesses.
In this update Gerry talks about how owners need to constantly look for ways to remove themselves from the day to day operations and the lack of added value to a business in selling someone else’s product.
You-proofing your business
Making your business less dependent on you has a number of benefits:
- You can scale your company more quickly if you’re not acting as a bottleneck
- You get more time to enjoy life outside of your business
- A business less dependent on its owner is much more valuable to an acquirer
Pulling yourself out of the day-to-day operations of your business is easier said than done. Here are three specific strategies for getting your company to run without you.
1. Think like LEGO
If recurring tasks in your business came with Lego-like instructions, it would ensure that any staff can carry them out without needing your input.
Ian Schoen built Two Tree International, a design and manufacturing firm that brings products directly from concept to customer, from nothing in 2008 to a turnover of $4 million and a staff of 15 employees when it was sold in 2015. Schoen credits his operating manual for allowing him to sell his business for a significant premium: “We started creating standard operating procedures in the business and had a set of documents that helped us run the business. Basically we could plug anyone into any position and have them understand it.”
2. Imagine hosting your own “AMA”
A number of high profile people from Barrack Obama to Bill Gates have participated in an “Ask Me Anything” (AMA) forum where participants are encouraged to ask the featured guest anything that is on their mind.
Now imagine you invited your customers to an AMA. What questions would they ask you? What really awkward questions would your most sceptical customers pose? These are the questions you need to document your responses to in a Frequently Asked Questions document that your employees can leverage in your absence.
3. Shine the media spotlight on your team
Consider promoting your team as the spokespeople of the company rather than yourself.
Stephan Spencer founded Search Engine Optimization (SEO) agency Netconcepts in 1995 before selling it to Covario in 2010. His first attempt to sell his business in the late 1990s failed because potential acquirers viewed the company to be too dependent on Spencer himself: “My personal name and my company name were too intermingled. If I didn’t go with the business, nobody was going to buy it.”
Spencer set out to reduce his company’s reliance on him personally and position his employees as the experts. “I encouraged key staff, various executives and top consultants within the company to speak and write articles, and I introduced them to the editors I knew.”
It can be tempting to run your company as your own personal fiefdom but the sooner you get it running without you, the faster it can scale into something irresistible to an acquirer.
The downside of selling someone else’s product
Are you tempted to re-sell someone else’s product to boost your topline revenue?
On the surface, becoming a distributor for a popular product can appear to be a simple way to grow your sales. But while distributing someone else’s product may be a relatively easy way to grow your top line, all that revenue growth may do little for your company’s value. A typical distribution company will be lucky to sell for 50% of one year’s revenue, whereas if you control your product or service – and the brand that embodies them – you should be able to do much better.
How Nike became one of the world’s most valuable companies
For an example of the dangers of not owning your own products, take a look at the evolution of Blue Ribbon Sports into Nike Inc. As Nike co-founder Phil Knight describes in his recent autobiography Shoe Dog, the company started off by negotiating the exclusive rights to sell Tiger running shoes in the United States. Knight’s company was called Blue Ribbon Sports and he imported the shoes from Onitsuka, a Japanese company.
Despite their exclusive agreement with Blue Ribbon, Onitsuka started to court other American dealers. When Knight protested the obvious breach of their contract, Onitsuka threatened a hostile takeover of Knight’s business or to shut him down outright. Knight’s company was tiny at the time and so deeply reliant on Onitsuka for supply, he could do virtually nothing to enforce their agreement.
Given its dependence on Onitsuka, Knight’s company would have scored close to zero out of a possible 100 on what we call The Switzerland Structure, a measure of your company’s reliance on a supplier, employee or customer. The Switzerland Structure is only one of eight value drivers we measure, but abysmal performance on any one factor can be a significant drag on the value of your business.
Onitsuka’s snub became Knight’s impetus to start Nike, which gave him control of his marketing, supply and product development. Instead of simply re-selling someone else’s shoes, Nike developed their own designs and contracted the manufacturing of their products to other factories. By owning its own products and brands, Nike has become one of the world’s most valuable companies and regularly trades north of 20 times earnings.
Learn more about how Crowe Horwath can help you build lasting value in your business: