Business Health Driver #3: Independence
Recently, we shared some of the key drivers of the overall health and value of a business in our blog 8 Indicators of Business Health. These key concepts can help business owners get the most out of their operations in the short and long term. So far, we’ve elaborated on Driver #1: Financial Performance and Driver #2: Growth Potential. Next, we’ll dig into Driver #3: Independence for sustainability or sellability.
Independence for Business Sustainability
With a strong picture of where you’ve been (Financial Management) and a strong plan for where you’re heading (Growth Potential), we turn our attention to the foundation you are building upon.
When evaluating the health and worth of a company, one thing assessors, lenders, investors, and buyers look at carefully is independence. If your business is overly reliant on one entity, the question of business sustainability (or sellability if you’re ready) looms large.
Improve business sustainability by increasing independence in four key areas: Customers, Employees, Suppliers, Products.
Improving Business Sustainability or Sellability via Independence
Customers: Most businesses have key accounts that drive more than the average amount of revenue, and most business owners are cognizant and careful about preserving the value of those customers. But what if something beyond your control changes the game? Any number of things like a new chief with a different point of view, a downturn in the economy, or new regulations can take your biggest customers in other directions. If your business relies on a single customer for 15 percent or more of gross sales (and some say even half that much), there may be real concerns about business sustainability and eventual sale.
Employees: Do you have that one person on your team who’s been with you since the beginning, who has the most institutional knowledge or a technical skill no one else possesses? This is another area for concern and need for business sustainability. Consider building in fail safe contingencies like succession planning, knowledge transfer and cross-training to protect your business from stalling or failing in the case of unexpected employee absences.
Suppliers: Consider what it takes to deliver finished products or services to your customers. Overdependence on any one supplier can elevate risks and lower the value of your business. If your parts are stuck on a cargo ship, can you still deliver? If there’s a worldwide shortage and related price spike on a key ingredient, do you have an available and/or cost-effective substitute? Diversify your supplier network for greater independence and improved business sustainability.
Products: Whether due to supplier issues, innovation-related obsolescence, new competition, or changing customer preferences, overreliance on a single product or set of products can leave a business reeling. This is also related to growth potential. Consider enhancing business sustainability or sale valuation through balancing your offering in ways that increase independence and add to the sustainability of your business.
Consider the Alternatives
Whether your goal is to sustain or to sell, business health is the only way to get the most out of your life’s work. If you’re ready to assess the state of your business and/or work toward a healthier state, there are a number of ways to approach the process. Learn more and/or take an assessment.
We are the W Alexander Group, headquartered in Cincinnati. We are not consultants or business brokers. We are private minority investors who work in active partnership with owners to provide an alternative to selling their business now through strategic and operational initiatives. Our uncommon approach protects owner equity and provides an interim step, allowing for a more planful change and down-the-road sellability when you are ready to transition.