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From Paul Spencer of Second Nature Solutions, a conversation about the complexities and nuances of building resilient family enterprises, especially in the face of economic and political uncertainties that loom on the horizon. See more at secondnature.solutions.
Paul Spencer: We continue with the
ownership series and, uh, we've already
done the financial performance aspect.
There's eight total aspects of
evaluations that we use as buyers,
but also as owners of our assets.
We should be thinking about all of those.
And again, these are
the ones that I've, um.
Put together, which really aren't mine.
They're just, uh, from all
of my m and a banker friends.
They have, uh, provided me
the insight into all of these.
So I am not the guy that, that you come
to, to buy or sell your business, but
I'm the person, right, as you know, as
your personal advisor, that will help you
take the key evaluators and help build
value and worth within your business.
As an asset.
And so what we talked about
before was the, uh, financial
performance, just as a review.
There's financial performance, there's
growth potential, key dependencies,
recurring revenue, right to win, which
is basically how you are differentiated
within your industry as a competitor.
Uh, there's corporate structure,
key management and leadership,
and then owner involvement.
So those are the, those are the
different, uh, rubrics that you
run through to try to understand
what is the value of your business.
So the one we're gonna talk about
today is growth potential, and really
the question that you're, that, um.
Anybody that may be buying a business
is going to ask is what's the likelihood
to grow the business in the future?
And at what rate?
What's the pace of growth?
And that's a really important
question because as an investor or
as somebody who's looking to buy a
business, in order to run the business
is going to take some capital.
And that capital, whether it's
a hundred thousand dollars.
Or a million dollars, I'm looking
to, uh, put it to good use, right?
So I may have some altruistic reasons to,
um, maybe to, um, think about employment.
So how can I create a, a business
that employs hundreds of people?
How could I create a business
that has good profitability and
can give back to the community?
How can I, uh, have a business that's
forward thinking and creating a, a
new industry that's very innovative?
Whatever the buyer, um, has
aspirations for, that's also what
they're thinking about the investment.
So there's some altruistic things,
and then obviously in the end,
they're not just gonna throw money
away to a business that is not
profitable, that is unable to grow.
Or it's never demonstrated an ability
to grow or, uh, the pace of growth is
so minimal that, um, I'm not able to
get a, a nice return on my investment.
So those are the things that, that you're
gonna be thinking about as a buyer, but
as somebody who owns the asset, these
are the things, like we talked about,
financial performance, having our monthly
review, having the discipline of having
a process to review financials, to mature
that process right, and to have a rhythm.
That's really important and in order to
know your growth potential, that feeds
into financial performance process.
And so we talked about, uh, last time we
talked about the pro forma and being able
to forecast out well growth potential is.
One aspect of that is your
financial performance forecasting.
So some of the things that you might
be considering in this area would
be, uh, my current market share.
So.
Um, if you think about market cap, right?
When we're thinking about investing
and buying stocks and right, some of
the evaluators you use to even look
at purchasing a stock out on the
market is what's the market cap of
that industry and what percentage does
that business own of the market share?
And so you as well as a business owner.
Own a certain market share, uh,
within your industry, within
your market capitalization.
And so that's important to understand
is how much of the market do you own?
Do you own 10%?
Do you own 1%?
Do you own 70%?
All of that is going to be another key
evaluator that the buyer, potential
buyer is going to use to, um,
understand the value of your business.
The other thing that I think is important
that a lot of people tend to overlook
is the abil, what I call the saturation.
So we would like to
saturate the market, right?
So if we're, let's say we're at a.
Um, we believe just that, and you
don't, you don't have to do, you
don't get super technical and,
uh, spend a lot of time on this.
You just say We're
about 10% of the market.
We own 10% of the market share
and, um, give or take, right?
But then we say, how do
we saturate the market?
How do we gain more market share?
How do we get 20%?
How do we get 30%?
And that typically leads.
The sales side, or at least the
strategic side of the business to
start to look into new customers,
which is totally acceptable.
However, there's another part of the
business which is saturating the current
business within your current customers.
And, uh, when we go through this
exercise a lot with, with owners is,
um, they don't realize that within.
One of their key, um.
Uh, customers or maybe even a handful of
key customers, is that inside there, uh,
that, that customer's business, you may
do, you may do, say, say you do a million
dollars of business with that particular
customer, or $500,000 worth that.
Um, and for your business,
that's a lot of money and it's
a good portion of your revenue.
Hopefully it's not all
of your revenue, right?
That would be another evaluator that
that's to come up is where, where
does all your revenue allocated?
But let's just say you have a nice
revenue space with a current customer.
Um, the next question is, how
do I saturate that customer?
Which basically means how do I do
more business within that customer?
One, they, they like me, they
must like me, or they find
my, my services, uh, valuable.
Right, because if, because of
that, they give us a nice chunk
of revenue, and so because of that
we have relationships with them.
We like, we likely are friendly
with each other and it's much
easier to talk to them about.
How we do more business?
What are other things that are
going on within your business?
What are, uh, some of the
challenges that you have going on
within your business currently?
Oh, did you know that
we also do X, Y, and Z?
And then now you can start to saturate.
Uh, your products and services within
a current business or current client
of yours, that's super important.
And if you can demonstrate the
growth potential, not only within
the market itself, but within
existing customers, super valuable.
Um, another thing that you can, you can
demonstrate is tangential markets, right?
Uh, a market that's
tangent to where you are.
So it may not be the.
Um, the line of business that you're in
currently today, but, uh, it wouldn't
take much effort to go from here and to
skip over to here and create a new line
of business in say, a different industry.
But it's similar in the types
of capabilities that we have.
Um, and that's another aspect, which is
understanding your core capabilities.
So what are the things
that you're really good at?
Um, there are likely three.
To maybe six core capabilities
that you have within your business.
Um, and you may be in the manufacturing
business, you may build cylinders,
you may build, build micro products.
Um, that could be a core capability,
but really what your core capability
is not really the manufacturing part,
it's more about the design of products.
It's more about the
procurement of materials.
Um, it might be even the
marketing of different products.
Um, so you wanna, you kind of
wanna expand away from the very
detailed work that you do and that,
that defines a core capability.
Um, there's actually a really good, um.
Um, blog posts out there on, on the
website about core capabilities.
Another thing is blue ocean.
So you can take your Blue Ocean
strategy, cool book around,
uh, how to create new markets.
And so you take your core capabilities,
you have your understanding of what
you do, what you're really good at,
where the market sits, and then you
take that and you transpose it into
something over, off to the side here that
potentially has a different customer base.
Um.
In a different market, which
is also very interesting.
These are things that you
don't necessarily have to,
um, practice all the time.
They would be valuable in your
business, obviously, as far
as growing a, uh, an asset.
Um, but these are things that you
would think about in order to answer
the question as what's the growth
potential in the future and at what pace?
These are the ingredients to be able
to answer that question, whether you do
them or have exercised them currently.
Or you're just giving your
buyer, um, some food for thought.
Um, another thing that goes into all
of this is thinking about the history
of your business and the forward
progress that you've demonstrated.
Uh, again, this comes through
your, your financials.
But it's also part of your,
um, your business story.
And a lot of you have these things
out on your about or your history on
your website, which says that, uh,
grandpa X great-grand, great-granddad y
founded the business in 1912 and right.
And then you got a little dot and, and it
was just him and, and Jimmy with a truck.
And then another dot and says 20 years
later, they were doing this in 30 years.
And then, and then the third generation,
and then we brought in and bought
this business and partnered with this
other fa That's your family story.
That's the business story.
Um, but that history demonstrates
forward progress and not only the
culture that's within your business,
but also the way that your business
is, has capable, is is capable of.
Pivoting, moving with different, um,
imposed inputs, as we would say, right,
with the, the economy and the different
shifts around us within our industry
and the, our ability to pivot and our
ability to demonstrate forward progress.
Um, forward progress
doesn't always mean growth.
But it is a component of growth.
Right.
Um, lastly, the, the last last thing
to be thinking about when we're
thinking about growth potential is,
um, the constraints and headwinds.
Um, particularly within our
own industry or maybe within
our own business structure.
Um, and so a headwind within our
own business could be that, um.
Maybe our location or the region
that we're in is tough to hire.
Um, maybe it's, uh, difficult,
uh, to travel, um, because
there's not an airport near us.
Um, those kinds of things could be
constraints or headwinds, but there's
also industry headwinds that says maybe
we're in a highly regulatory business.
And say healthcare And, um, the
insurance and the government rules
are constantly changing, constantly
shifting, uh, depending on the politics
and the industry, um, profitability.
And it's really difficult
to, to, um, be able to be a
forward thinker in our industry.
Um, and then there's, there's one
category that kind of branches
off to that, or what are different
risks associated with the business?
Um, which again, from a regulatory
business, uh, maybe there's
a high liability, um, maybe
you're in the business of, um.
Maybe, yeah, maybe you have a factory
and, um, you deal with chemicals and so
there's a lot of risk, uh, for, um, fire
or maybe employee, um, health issues
or, um, any things like that, volatile
kind of components within your business.
So anyway, those things are
important, whether you, uh,
whether that goes into the package.
Uh, in terms of growth for your, um,
for your buyer, um, that's up to you.
Um, but for you as an owner of an asset,
in order to understand the forward
progress, the pace of growth, and the
ability to grow, to saturate the market,
to go into a different market with a
blue ocean strategy, to be able to twist.
Or pivot some of your core capabilities
or expand on your core capabilities.
You have to understand your
cons, your main constraints, any
headwinds that you have and the
risks involved with your business.