Increasing the value of your business requires an understanding of the 8 key value drivers. The first two value drivers, Financial Performance and Growth, were discussed last month. This month we address the third value driver, Switzerland Structure.
Switzerland Structure refers to how dependent your company is on any one customer, supplier or employee. The greater the dependence, the greater the risk and the lower the value.
What would happen to your company's profitability if you lost a customer who accounted for over 50% of your total revenues? Potential purchasers perceive companies that are overly dependent on any one customer to be much riskier to acquire and may be dissuaded from acquiring the business. At best, they may offer to acquire your business for a deeply discounted valuation multiple.
To maximize the value of your business, strive to have your top 5 customers account for less than 20% of total revenues.
What would happen to your input costs if a major supplier that you are dependent on decided to increase costs or restrict volumes? Companies that are dependent on any one supplier for a significant portion of purchases are perceived to be much riskier companies to acquire. Potential investors may stay away from your business altogether or offer to acquire the business based on a much lower valuation multiple.
To maximize the value of your business, strive to acquire your inputs from at least three or more different suppliers.
What would happen to your business if your sole sales rep, who is responsible for over 50% of the company's revenues and has personal relationships with your customers, resigned? Companies that are dependent on a key employee are riskier companies to acquire and will likely sell for a reduced valuation multiple.
To be as valuable as possible, your company needs a sales team - not just a single salesperson. Hiring a single sales rep will only keep your business reliant on one person - you need to build a sales team. Here are three tips for building a sales team:
1. Charge customers up front - sales reps are expensive to find and train. Consider charging some or all of your customer bills up front so you will have more cash to build your sales team and more time for them to train up.
2. Carve territory into small chunks - carve up your market into sales territories or service lines that provide enough opportunity for multiple sales reps to make money.
3. Hire a second rep as quickly as possible - start by hiring two sales people, not just one. Sales people thrive on competition, and in order to be a sellable company, you need to be able to demonstrate to a buyer that your sales are driven by a sales team and not just one high performing salesperson.
Businesses that are not dependent on any one customer or supplier and can easily replace their top salesperson are more than twice as likely to get an offer to buy their business as those companies who are overly reliant on a single customer, supplier or salesperson.
Would you like to know where your company ranks under the Switzerland Structure value driver? Take 13 minutes to complete the Value Builder Score and receive your score out of 100.
Empirical evidence shows that companies with a Value Builder Score of 80+ receive offers that are 71% higher than the average business! Simply put, reducing your company's dependence on any key customer, supplier or employee will increase the value of your business.