Make Your Company Independent, NOT Dependent – The Switzerland Structure Value Builder Driver
This month we are going to look at another driver of value for your company. This one is called the Switzerland Structure. Now, you may be asking yourself why? Let us look at the history of the country of Switzerland, this little country deep in the heart of Europe, and you find that there is an interesting background. Switzerland did not join either of the world wars despite being in the epicenter of the fighting. They decided not to cozy up to any of the geopolitical factions that were forming and decided to remain independent. They did not send troops to Iraq during the Iraq war, they wanted to remain independent. When the Eurozone started to use the euro currency, they opted out and kept their own currency. In fact, they did not even join the United Nations before having an entire countrywide referendum on whether to join. They are obsessed with remaining independent, and so we gave the name of the Switzerland structure to defining how dependent your company is on anyone customer, employee, or supplier.
Those that become the best on the Switzerland structure attribute having found a way to remain independent like the country of Switzerland from any one of those, so they do not have a reliance on one customer, they are not too dependent on a single employee, and there not too dependent on a single supplier. The most valuable companies that we see are the ones where the owners have no personal relationship with the customers because they have good customer diversification. They have hundreds of customers, not dozens of them.
To go back to the statistics, as we have discussed in previous months, we know the average multiple offered the businesses that have gone through our scoring assessment in Value Builders is 3.76 times their pretax profit. This is from 1,000’s of cases researched. But when we isolate those that know each of their customers by first name, those companies are seeing a significant discount – less than three times pretax profit. Again, if you know each of your customers by first name, it is going to be difficult to extract that business out of the hands of you, the owner, and acquirers going to look at that and say, “but it’s too dependent on this one employee, the owner and just a few handfuls of customers.” There is too much customer concentration and too much employee dependence, and so it is going to perform low. If you look at those businesses where the owner rarely gets involved in dealing with a single customer, in other words there is a lot of customer diversification of the owner personally managing their customers, those businesses are getting much higher values. In my early days nearly 30 years ago, I worked extremely hard to learn my customer’s names, especially those over the counter. But then we opened our second physical location, and I could not be at both places all the time. It was then that knowing every customer was no longer possible or needed. I would have scored extremely low in this value area back then, but not now. Today, I only know legacy customers (those over 30 years) or those our CSRs introduce me to. This is also easier if your family name is not included in the company name.
The second area to increase your Switzerland score deals with dependency on key employees. This is an area I had huge struggles with for many years. I was truly a hostage in my own business. I know many reading this have felt the same way OR feel that way now. BUT NO MORE. So how do we do that? First let us focus on the short-term ideas and then a longer-term solution. In the short term, what you want to do is make sure you are doing everything you possibly can do to retain your key employees. As I show you this laundry list of ideas, I’m not suggesting you apply all of them today or adopt them all, more to just get your mind spinning on the different ways you could retain key employees in the short term. Stock options, stay bonuses, flex hours, extra vacation, training opportunities, advancement opportunities – all these are standard ways that you could keep your hands wrapped around your key employees today. Of course, what you want to do is overall reduce your reliance on these key people, cross train other employees to make sure that key jobs have at least two people that can actually execute them, but even better than training is automating. I have a huge desire to automate anything that can be automated. Whether it is payments, ordering, payroll, HR functions, bank reconciliations, or marketing functions. Can you document your standard operating procedures so there is an employee manual that people can follow? This would allow a “plug and play” for employees so that they could follow your procedures. Think of McDonald’s as the ultimate procedure maker.
And lastly, suppliers are the third area where you may become overly dependent. Having only one key supplier could have a major impact for your company, and so what we want to do is diversify the suppliers into the point where no one supplier is dominating your supply chain. Different parts of the country struggle with this very situation. You may only have one viable supplier for your core supplies. This puts you in a very vulnerable situation. At least two of our MFM members experienced in the past year because that one vendor closed their door. Now what is your backup? What would a potential buyer think of that situation?
We have looked at numerous factors in the Value of your business over the past number of months. If you are at all curious as to how you would score, I encourage you to take the VALUE BUILDERS evaluation and get your score to see where you are currently. There is no cost or obligation.
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How Business Coaching Can Help
Service companies, trades, restoration companies, dry cleaning businesses, laundry businesses come to me for assistance in:
- Developing systems to create smoother operation, improving processes and removing bottlenecks
- Implementing team management practices including meetings, delegation and working with challenging communication issues
- Interpreting financial statements and using the information to make better decisions and become more profitable
- Sales and marketing help to get better clients and bigger projects
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This month, we discuss the tenth of the Value Builders drivers with our focus on cash flow. We call this the TEETER TOTTER. Our goal will be to maximize the cash flow coming from the day-to-day operations of your business.