How to Reduce Dependency to Improve Value
Business owners like to be in control, but as your business grows and evolves it can develop in a way which creates dependency and weaknesses. Hairline cracks in your walls, for want of a better description, just waiting for the next big storm.
Yet during that initial growth of a new company or new product line, all focus is on sales and cashflow. These weaknesses are hidden. They become part of the landscape and so familiar that we don’t always recognise their danger. Here are some specific examples.
Customer Dependency and Over-Reliance
Consider this, you have a growing business with a healthy turnover, but too much of your business is with one main customer. What happens if one day that customer no longer requires your services?
Consider you’re a small manufacturer making teddy-bears for Toys R Us and they represent 75% of your annual turnover. Toys R Us are yet another big name now in administration. Would your business survive an immediate drop in sales of 75%, out of the blue? Many before you have not.
Without your main customer, what are you worth? If your main customer is more than 15% of your business income, you’re probably worth less that you hoped.
You face exactly the same risks if you depend heavily on one sector of the market. Blockbuster Video were a good example. They faced 2 major changes. Video to CD initially and then the change from high street stores (with all the rent and maintenance they bring with them) to a download and streaming age. Less than 50% of the Fortune 500 companies from the year 2000 are still the same business today.
It’s hard to be at the forefront of new innovation. It can go expensively wrong. Did you choose VHS or Betamax? Did you choose Sky or the BSB Squarial (ask your grandparents!)? When the market does makes a global switch in one direction can you keep up with it?
It’s so easy to get comfortable. If someone delivers to you on time, every time, on budget and without fuss, it does breed loyalty. However you need cover and flexibility in your supply chain and should have at least 2 good working relationships for everything you need.
This prevents your business suffering if disaster strikes and your chosen supplier can’t deliver, but this also helps guard against unfair changes to prices or contract terms. When you have a choice of supplier, you have the choice to reject changes being forced upon you.
Stable, Broad Base
When it comes to the value of your business, buyers do consider whether your foundations are stable and broad. A business with too much dependency in any one direction will attract fewer buyers, a lower selling price and unhelpful payment terms. Even if you’re not ready to sell, ensuring your don’t expose your business in this way just makes for sound business sense and provides an ability to react and adapt with the changing world around you.
So, is it time to pay attention to those structural weaknesses that have sneaked in under the radar whilst you were distracted in building revenue. If you would like to assess how your business fairs in these areas please contact us to take one of our Value Builder Scores.