Welcome to Resilience Talk hosted by Paul Spencer of Second Nature Solutions.
Let's dive in.
Paul Spencer: The next topic for the ownership series is key dependencies.
If you think about what we've talked about so far, financial performance and
growth potential, we've talked about how as an owner, it's important to be thinking
about how we're performing financially and having a rhythm and a process in a mature
way of, um, evaluating our financial.
Prowess, but then also understanding what is our growth potential.
All within the mindset, which is the point of this whole series, is
that as an owner, I own an asset, so I'm not just running the business.
I don't just have a job.
I'm not just doing a hobby.
Anything that I'm doing as part of a business, as an owner is the aim is for
me to create an asset, and that's the, that's the point of this conversation
is to get you to start thinking about building value into your asset.
So we've talked about eight different aspects that we can be evaluated or are
called key evaluators that a third party may be using to come in and basically
do an appraisal of your business.
Now these eight aren't the.
Only eight.
Um, some of these will overlap with some of the things.
If you do a Google search or if you go out and you talk to chat
GPT or Claude, you'll get a, you'll get a mix of some of these things.
These are the ones that I've learned through through my networks, and we're
just gonna review 'em real quick.
The first one is financial performance.
The second one is growth potential.
The third is key dependencies.
The fourth is recurring revenue.
The fifth is right to win, which basically means that I am a,
uh, player in my market, and so people choose me over others.
The sixth is corporate structure.
The seventh is key management and leadership, and the
eighth is owner involvement.
And we'll be going through all of these through this, uh, through this series.
Today we're gonna focus on key dependencies, and what that means
is how dependent is your business?
Is your asset on any one employee?
Or supplier or customer, maybe even, um, a certain product.
And what that means is how malleable, how fault tolerant is your business.
Now we talk a lot about with key, um, not key but imposed inputs.
So when we, when we have an awareness of the system and we know
that sales has inputs, has leads.
Has potential customers, has budgets, client budgets.
Those are inputs that come into my system as a salesperson.
And then my salesperson has a process.
And what comes out of that process would be a closed deal, right?
A new customer revenue, a signed contract, maybe some legal documents.
Those inputs then go into service.
Or into our product.
And then there's a delivery cycle, right?
So we know that as part of awareness and when we're thinking about
the inputs, we have chosen inputs and then we have imposed inputs.
And the chosen ones are, uh, let's use the sales example.
A chosen input in sales would be our ideal customer.
We serve, uh, this particular customer because we enjoy, um, their behaviors,
their attitudes, the type of.
Service that they thrive on or that they want or they enjoy fits right
in exactly into the type of product or service that we provide, as
opposed to this customer does not fit, and we constantly are at odds.
Perhaps the quality or maybe, um, wanting to change our service or
maybe our values are different.
And so we're always kind of going at, we're at odds with each other.
That is not an ideal customer.
We get to choose who our ideal customer is, and we may start over
here where we don't have the, the best relationship with our customers,
and we learn that, you know what?
Based on how we're interacting and the, and the services and products
that we're, we're providing.
It's not a match, but if we were to tweak this and this about our customer,
we would get a more ideal customer.
That is the flow of a chosen input.
Right?
An imposed input is one where I don't have a choice.
So, um, one that we always bring up is the weather.
So if we build houses, we're a residential contractor, uh, developer, if it
starts raining, there's only a certain amount of things that we can do in
the rain, and that's an imposed input.
And we cannot change the weather.
Now maybe we can build structure to build a house.
Over our development so that it's shaded and so that there's, the
weather elements don't, but that's probably counterproductive, right?
So it sits in the inpost input.
So why do I bring all this up?
Because a key dependency can be from a buyer's perspective, an
imposed input into your business.
So let's say that you have.
A key production manager who has been with your business for 15, um, 20 years.
They know the business inside and out, and they're really good at what they do.
Lots of experience.
Um, they know your customers, they know how to run all the tooling in the shop.
And what happens as a, as a key dependency is that if that, and when that person.
Takes any significant time off, we have a significant drop in either quality
or speed of delivery, or maybe both.
And that's a well-known thing in our business.
Um, but it doesn't really matter much.
Or we haven't thought that it mattered much because John is a,
is a dear friend of the family.
He's, uh, really good and loved within the business and with all the employees,
and the guy just never takes time off.
Why would he?
He loves his job.
He loves what he does.
And he may take a, a Friday off here and there, but most times
he's here 24 7 because he loves it.
And so we've never even had to address the issue that when he is
out, 'cause we've had ex experience times when he's been sick or he's
taken a, a longer, uh, vacation.
So then we, uh, we've noticed these things, but we haven't.
We haven't spent any time to address it.
That is an imposed input to an own, uh, to a buyer.
To you.
It's not that big of a deal for me.
If I'm gonna buy your business and John is the only one who could really dev,
deliver quality and speed of delivery for your product, then that's a risk for me.
What if I buy the business and John, who I've already described as a dear friend
of the family says, I'm gonna retire.
Right.
That's, that's a perfect, uh, insight into an imposed input, which in this
case we're calling a key dependency.
So we, we may have several, or one, or two.
Typically we have one, two, or three key employees within our
business that match everything that I just described about John.
And so we need as owners and as our asset.
As we're building value into our asset, we need to be aware of that.
And so, uh, we're not gonna push John out.
We're not gonna force him to retire.
We're not gonna, uh, do any of those, uh, what we would say
manipulation or mean-spirited things.
But we're gonna start strategically planning for how do we add more
capacity in the pro, in the, uh, product management side.
Right.
And uh, and so then we starting to create a little more fault tolerance
and what we're essentially doing in when we're aware of our system,
right, aware of our how our.
Processes are connected.
We are starting to move that imposed input into a chosen input.
And from a buyer's perspective, again, I am adding value to my assets.
So when a buyer comes in and knows that we tell, we tell them about John.
A key employee, he's really awesome.
Does whatever he does, um, and we love what he does and we've got
processes built around him and he has an apprentice, or he has a team
that works very closely with him.
And when John is out for a week or two, that team is
able to do whatever John does.
That is a chosen input and that reduces the key dependency on the employee.
Super important.
When you're able to say what I just said, because you are strategic
about understanding key dependencies, especially with employees.
Specifically with employees, you are adding value to your business.
Um, another one that's that's well known is a customer.
So, um, sometimes we get top heavy, especially if we are new, um,
new meaning 10 years or younger.
We tend to have some core accounts, um, that have been
with us for a really long time.
Um, we're able to build out those accounts and they account for 60, 70, maybe even
80% of our business, of our revenue.
And, uh, uh, sometimes some for some companies that are still young,
again, 10, 10 years or, or younger, um, there is only one of those.
So sometimes you may get three key accounts, um, but a lot of
times it's one primary account.
And again, that's an imposed input from a buyer's perspective.
There's a lot of risk knowing that sure, you've got recurring revenue, which
again, is the next, uh, evaluator that we'll talk about in the next, next topic.
Um, but you might have good recurring revenue, but if it's
from one, only one customer.
That increases my risk as a buyer.
So again, I need to be aware of that as the owner and I may be okay, and I
have a great relationship with this, with this organization, this customer.
Um, and all of those things feel good to me.
And I'm not in any hurry to need to diversify or do anything for
lots of various reasons, right?
Um, but the buyer will not buy into that.
Um, so again, another strategic thing is how do I add more recurring revenue?
How do I diversify my revenue, and how do I reduce my key dependencies?
With regard to customers and revenue.
Another one, um, could be supplier.
So, uh, we saw a lot of this recently over the last, uh, since
COVID and especially up until about 23, maybe a little bit into 24.
Um, and even, even, yeah, actually, even with the tariffs, right?
Recently with, with the Trump administration applying tariffs, is
that if you have a key dependency on an international supplier, and that
supply chain is disrupted in any way, either through tariffs, government
policy, which is imposed input, or through the health scare, right?
The COVID virus, which is also an imposed input.
And, uh, there could be other, um, more kind of like weather related.
Um, there could be infrastructure.
Maybe, um, cargo ships or railroad, um, disruptions, right?
Any of those things affect supply chain.
And so if I have a key, again, a key dependency of a supplier
that's international in China, and I get hit with a multiple
whammy of tariffs, COVID, right?
I cannot get my supplies, I can't get my product in, in order to build.
The product that I provide to my customers.
And so there's lots of ways to evaluate suppliers.
Doesn't need necessarily need to be international.
It could just be, uh, materials, the type of material is hard to find,
which we've been talking about also with, um, the rare earths, right.
Those types of things.
Or maybe even.
Um, your supplier maybe is very robust or mature in a certain region
of the country, uh, but you're on the other side of the country.
And so getting shipments, um, may have long lead times or maybe, uh,
because you're so far away, you have a lower priority on getting
shipments, all kinds of things.
There's a million variables that go into that.
But anyway, the supplier side is another key dependency, an imposed input that
the, that the buyer is going to evaluate.
Now, you may say that part of our business model is to have a reduced.
Um, to have an increased quality, um, reduced cost.
And so that's my strategic model to have some of these
key dependencies on suppliers.
Um, and that's okay, and the buyer can buy that concept.
Um, but you just need to be aware that any kind of.
Um, failure mode that you've built into your business will
reduce the value of your asset.
So, um, any other things around that that I would encourage you to
be thinking, um, around either key employees, maybe even your corporate
structure, customers, suppliers, even raw materials that you may be needing.
Um, if you're in the services business, you're probably heavily rely on software
and vendor services, vendor software.
So those are all things that fi fit into your risk analysis
within your key dependencies.
So all good stuff.
I would assume at this point that you are well on your way on
doing your financial performance.
You've started a, a key, uh, group team.
On understanding your growth potential, and now you can start
working on your key dependencies.
Have fun.