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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.
Welcome to Resilience Talk hosted by
Paul Spencer of Second Nature Solutions.
Let's dive in.
Paul Spencer: You know,
ownership is not for everybody.
So we're talking about the ownership
series today, but there's some of us
who would not enjoy owning an asset,
especially something like a business.
It's too complicated, it's too stressful.
Um, I don't get it.
I'd rather just go to work.
Uh, I enjoy the job that I have.
I enjoy the people I work with.
I enjoy the things that I do, and I don't
want the extra added pressure and thought
process, the extra knowledge needed
in order to run the business as well.
And I think that that's okay, and
that's, that's a given, that's a fact.
Um, so there are lots of people who enjoy.
The dream of owning a business.
Um, but once they get into it and they
start to understand the, the thousands
of steps in order to do that, um, they
tend to, um, resort or revert back
to the comfort of their own, um, work
lifestyle, which is not a bad thing.
You know, I used to teach a class.
Here in Cincinnati for entrepreneurs.
And, uh, these were for people who had
really never even owned a business, um,
or had created any kind of entrepreneur
experience, but they had ideas.
And that course was over a
course of nine weeks and.
A lot of it was really digging into the
idea, uh, having to understand costs
of goods sold, how having to understand
the price ratio and the expense ratio,
and how are you gonna actually make
money if you sell this thing for $10?
What's your profit?
If you send it for a hun, sell
it for a hundred dollars dollars.
What's your profit?
Who's your ideal customer?
All of those things over the
course of say, um, not even
halfway through the nine weeks.
Uh, you could just see, you can sense
that this is a lot my idea, which is,
uh, for the most part, good ideas.
Um, don't even pass the muster of.
Making a business around it
or my idea is too complex.
I don't know how I could get money
or just like what I said before, the
complexity and the knowledge and the
back office pieces in order to get this
thing to run is just too much for me.
And that's okay.
And the reason why I
bring this up is because.
That ownership is a unique thing
and it takes, um, unique people
to go ahead and dive in, create
a business, run a business.
So there's another concept called the
entrepreneur versus the intrapreneur,
and the entrepreneur is that visionary
who starts something from scratch.
They take the idea, they have the
drive, they have the initiative, and
they're, they're really risk tolerant.
They're, they're very risk tolerant.
They're willing to step out
there and, um, and lose.
They're more than willing to lose.
Do they accept losing?
No, they do not accept losing.
And that's where the drive comes in.
And those people, um, are
very good at what they do.
They can drive the business through.
And those are typically the founders
of, of these family owned businesses.
That's who they are.
The second generation, what I've
come to find are the intrapreneurs
and the intrapreneurs are, uh, still
very open-minded, very innovative,
um, but they don't really have the
desire or maybe even the personal
makeup to go start their own thing.
They're not gonna start it from scratch.
They may not have the drive, uh, that
mom or dad had, and they may not have the
makeup for it, but they're really good.
Uh, succeeding their mom or dad
or maybe aunt, uncle, right.
Coming in and taking the president's
seat and really growing the business,
really innovating the business.
And they're really good at that.
And that's an entrepreneur.
So I think that's also interesting
to be thinking about as well as,
uh, yourselves and those around
you, your friends and family, sons,
daughters, nieces, nephews that, uh.
To have that in mind.
Some are geared for owning, some are not.
Some are geared for founding entrepreneurs
and some are geared for innovating and
taking what's already there and innovating
and, and compounding on top of that.
So anyway, thought that was a, uh,
helpful context for what we're talking
about with the ownership series.
And we're in the middle of.
Uh, we're on the back end of the
evaluations that we've been talking about.
There's eight of them.
We're gonna be talking
about the sixth one today.
And just as a review, we have financial
performance growth, potential key
dependencies, recurring revenue right
to win, corporate structure, key
management and owner involvement.
So last week we talked about,
um, the recurring revenue aspect.
Today we're gonna talk about Right to Win.
And Right to Win is essentially, uh,
the phrase is, how well differentiated
in the business is the business from
competitors, right within your industry.
And, uh, basically what that
means is, uh, how well known are
you in your industry and, uh.
From a quality perspective, from
a relational perspective, uh,
that they're going to pick you
versus somebody else, right?
And so one of the, uh, easy ones to
think about with that is Coke, right?
Um, we all know what a Coke is, but
sometimes we say, do you have a Coke?
And really what we mean is, do you
have a soda or do you have pop.
Right.
I know that's a whole thing.
Soda or pop, right.
And, uh, so Coke is well differentiated.
It has a right to win.
It's probably much easier to go and
sell, uh, a Coke product than it is,
uh, a different kind of soda product.
And those are, those are
different markets, right?
So anyway, when we're, when
we're thinking about Right to
win from a buyer's perspective,
um, having that differentiation.
Adds value to my asset.
And so we, I tend to think about
this in as a blue ocean strategy.
So if we think about when we're talking
about recurring revenue from, from last
time, I like the divergent thinking.
Um, when we talked about all
those different categories,
consumption, um, comes to mind.
Um, organizational, um,
comes to mind licensure.
All of those things are more divergent
thinkings because you may not be
in consumables, you may not be in a
licensing, a traditionally licensing
industry, but when you throw those
things all on the board and you put
those ideas together, you may be able
to find something that's a consumable
or something that we can license,
or both within our industry, within
our products, within our services.
So this is very similar.
Blue Ocean strategy is
another divergent thinking.
Series of books that are out there.
I think they're, uh, very interesting.
Uh, but when we're in a Blue Ocean
strategy, which basically says that,
um, and we'll use Coke again as,
as a, um, uh, beverage industry.
Everybody's over here and
they're selling six packs.
They're selling, selling 12 ounce cans.
Um, they're selling them
in the grocery store.
They're at a certain price.
Um, that's the industry, that's
what they would call the red ocean.
That's where everybody plays.
Blue Ocean says, um, can
I sell them as leaders?
Right?
Can I sell them in small?
Um, smaller sizes, can
I sell them in bulk?
Um, can I find a market that is not
already existing within the red ocean?
So you can, you can play
with all the factors there.
There's price, uh, there's
convenience, right?
There's size, there's accessibility.
All those different things start
to play out, and you might,
you might reduce the cost.
So let's say you're a premium brand
over here, and this happened actually,
I think with Revlon, with p and g.
Uh, they had a high-end, uh, brand
and, uh, and I could be wrong
with the, with actually brand,
but it's just a makeup brand.
And they started putting those
more into, say, Walgreens and
CVS at a lower cost, lower price.
And what they did is
they changed the market.
It was in.
And so more people would would buy those.
And so that's a blue ocean strategy.
So anyway, you can start to think about
how I play the game a little differently
than my current industry, my current
competitors, or what the buyers in my
industry tend to think of, and I'll do
it a little differently and why I'm gonna
do it a little differently, is because
they actually want or would prefer.
The different way of engaging, the
different way of purchasing, uh, than
what's in the traditional, uh, industry.
So anyway, blue ocean strategy,
there's reputation, right?
So you don't have to be Coke.
You can still be a small business.
But have a great, excellent reputation
within your industry and within your
customer base, and they like you, right?
Um, and that's the customer
experience part as well.
So you have a high reputation, you may
have a awesome customer experience that
is much different, uh, than the current
industry or the standards of the industry,
and that gives you a right to win.
There's a lot of, uh, around innovation,
which can give you some right to win.
Um.
Aspects, which is, Hey, we're moving
the ball, we're doing things a
little differently, and it's matching
up with a market in a better way
than the way we used to do things.
Right?
These are all different
components of Blue Ocean strategy.
Um, so do you stand out?
I think this is also very interesting.
My, I have a friend, um, up in
Calgary, um, he's a sales coach.
His name is Sean Case, uh, Casemore.
You would, you would enjoy him?
I would.
I, uh.
I recommend you look him up.
Uh, he's got awesome, really cool clips,
especially for the sales folks out there,
um, on disparate sales messaging tactics.
Uh, it's really good.
He does a really awesome job.
Anyway, he says this,
and I'm gonna read it.
Most salespeople leave the same
impression as everyone else.
They're polite, they're pleasant,
but they're also forgettable.
And then he asks.
Are you forgettable?
And I think that's really interesting
and, and he has a way of thinking
about, no, it's not saying we're
not polite and we're not pleasant.
Doesn't mean that we go
in rude and obnoxious.
Right?
But you have to
differentiate yourself from.
Your customers from others, from
just people, individuals, uh, so that
you're not forgettable, especially
in the sales side, but also just
as a brand and as a business is.
If, if you walk in the room and
they like being around you, you're
polite and pleasant, but you haven't
left them any value or any reason
for them to remember you, then the
question is, is are you forgettable?
Do you stand out?
Um, so when we think about other
right to win, there's ip, um,
which we think about processes.
So when we have our processes
in place, um, and the way we do
things, um, that is a, that is,
that has high value to the buyer.
It's, uh, well established,
well-established, well-known,
transparent and reproducible.
Meaning I could come in own the business.
I could have.
I have confidence that the, the people
currently working there and the people
I'm gonna bring in could run the
business because of the maturity and the
well-documented processes that you have.
Um, when we think about
culture, that's also an ip.
So you may have a unique
culture that would add value.
Um, you could have.
Suppliers unique, uh, supply
chain management or just
unique supplier relationships.
Um, and then of course brand.
We've already talked about Coke, but
right, when you talk about Apple, when
you talk about Dell, Microsoft, um, Coke,
um, Kleenex, Kroger, p and g, right?
These are brands, they're well-known
brands, and uh, just the name
itself leads to, uh, right to win.
Um, when we think about, I want to
go back to processes real quick.
The, the value in a process that is
well established versus one that's
not is, um, night and day, right?
So if you have a business that
is running fairly well, but as a
buyer, if I am coming in and you
can't quite explain it to me or.
Um, physically show me how it works,
then, um, I'm gonna, I'm gonna
reduce the value of your business
because it's much, it's gonna be much
more difficult for me to come in.
Or maybe if I have, um, uh, a
president in mind that I wanna
bring in, or maybe just in general,
I'm just gonna buy the business.
I'm not gonna switch anybody up, but
any one of you could leave because.
Um, you wanna retire or you really
liked the other owner and, and now
you're gonna go do something else.
There's a lot of risk there.
Um, if I'm just relying on the people to
run the business, huge, huge difference.
Very important.
Alright.
Um, so right to win
also goes to stickiness.
So we talked a little bit about
this with the recurring revenue.
Um, do we have an, a cohesive
ecosystem like we talked
about with the Keurig, right?
You buy the, you buy the machine,
you buy the hardware, and then
now you buy the consumables,
which are the cups that go in.
So if there's another type of cup that
doesn't quite fit into the Keurig machine,
uh, you can't buy those cups, right?
You have to buy the Keurig cups.
And then Keurig, I would
imagine licenses this particular
size, or there's some kind of.
Industry standard and Right.
And that's creating an ecosystem.
And that ecosystem could be an
external ecosystem, which is just
what we talked about, could also be
an internal ecosystem, which goes
into more, uh, software systems.
So you could have, uh, like an ERP
system or like what we talked about with
Epic, with, with healthcare systems,
when those systems are in place, those.
Technology systems, they create
an ecosystem around them.
So you have different, um,
applications that connect to them.
Um, you have different ways
of data sharing between them.
And once you have that kinda ecosystem
in place, it's very difficult to, to rip
out your ERP and put in a different one.
So that's stickiness.
You may have partnerships.
That are sticky.
Um, and because we have a good partnership
with, uh, well-known brands that have
good ip, they stand out, they have good
innovation, great at reputation, that
also adds value to our business, right?
Our right to win, um, market
share, we've talked about that.
You could have, you could have large
market share or you could have a niche.
Of a market, which may not be a large
market share, but that niche is very
isolated and very well protected by
everything we've already talked about.
And because of that niche market,
you have, uh, a lot of value, uh, a
high multiple that comes around that.
And then margins.
So when we think about, um, multiples,
if we're gonna talk about multiples, you
think about technology, uh, traditionally
in the past has a high multiple because
the margins are just much higher.
So when we're talking about technology,
um, and the ability to, uh, sell that
ERP or sell that software system, we
typically are able to get, uh, a 30%.
Uh, margin maybe even higher.
Um, definitely not, nothing below 20%.
And that gives us a higher
multiple than, say, a traditional,
um, labor type business.
Like say a, um, a plumbing
company or a HVAC company.
Um, their multiples are typically lower
just because their margins are lower.
Um, not.
Only because, but that would
be one of the indicators.
So anyway, with Right to Win, um, it's,
IM, it's, it's out of all the ones
that we've already talked about, right?
To win is the most difficult one.
Right?
It takes a lot of time.
Um, if we're looking to, if you've owned
your business for 20 or 30 years and.
You are wanting to implement these eight
valuations, and you're going to work on
financial performance, growth, potential
key dependencies, recurring revenue,
right to win is a long path, right?
To be able to build that reputation,
to be able to do that blue ocean
strategy, to create market share,
to create stickiness, right?
You can get to work on your ip.
Which is your culture and
processes much more easier to do
that in a shorter amount of time.
Um, but this one's, this one, you're
gonna have to take a, a longer
view to get to, um, in order to uh,
um, do well with the right to win.
Um, doesn't mean I wouldn't work on it.
Um, and like what we've
talked about before.
If it's, uh, if it's gonna take more
time, then I wanna work on it sooner
than later because I need that time
and I don't want to run out of time.
So anyway, that's right to win.
That's the next, uh, slot
in the ownership series.
Next time we'll be talking about corporate
structure and uh, thanks for listening.
We'll talk with you later.