In The Driver Seat: Navigating Customer Relationships & Differentiation

Mar 9, 2024

Key Points of Episode:

  1. Introduction: Simon and Steven introduce their conversation series focused on building valuable and sellable businesses. They discuss the importance of making this conversation accessible to business owners.
  2. Statistics: Steven shares some alarming statistics, such as three out of four businesses that try to sell do not succeed, and 70-90% of business owners’ overall wealth is tied up in their business.
  3. Value Builder Questionnaire: They discuss the Value Builder questionnaire, which helps benchmark a business, estimate its value, and assess its performance across eight different drivers of value.
  4. Customer Relationships: They delve into a question about the personal relationship between business owners and their customers. They emphasize the importance of moving away from a model where the owner is personally involved with every customer interaction.
  5. Differentiation: Steven emphasizes the importance of differentiating a business in the marketplace to increase its value and saleability. This involves providing unique value beyond what competitors offer.
  6. Empowering Employees: They highlight the significance of empowering employees to handle customer interactions and problem-solving rather than the owner being personally involved in every situation.

Overall, the conversation stresses the importance of understanding and actively working on the factors that contribute to a business’s value and saleability, including customer relationships, differentiation, and empowering employees.


Transcription:

Simon: [00:00:00] All right. Welcome, everyone. To our. We don’t know exactly what it’s called yet either. It’s called a show, a podcast, a roundtable conversation. But essentially it’s called in the driver’s seat driving business value all the way to a successful exit. And, uh, Steven and myself are partners at Denver Business Coach, and we have been in this conversation for a long time with our clients, with our network, with our strategic partners, and really want to make this conversation of building a valuable and eventually sellable business more accessible to people that are interested in that conversation. And so there’s a few statistics that are really driving why we’re doing that. And, Steven, I think I’m going to let you, uh, uh, share those with us because they’re really at the the foundation [00:01:00] or at the root of what inspires us to do the work that we’re doing on a day to day basis. So, Steven.

Steven: [00:01:08] Awesome. Yeah. So those stats that you’re referring to, uh, I talk about it all the time. It’s, you know, three out of four businesses that go to sell their business do not actually sell. Um, and this number does not include the ones that just decide to shut down, um, which which is probably a much higher number. Um, we’re only tracking the ones that actually tried to sell that. Don’t. Um, this is coupled with the stat of anywhere between 70 and 90% of business owners. Overall wealth is tied up in their business. So, uh, when you think of why this is a problem, uh, think about owning your business, working in it for 20 something years and, uh, say, going same one day. Hey, I want to sell this and cash out [00:02:00] and live the rest of my life, uh, on that, on my retirement. Um, or just the money that you want to fund your next adventure with, and then realizing that you can’t, uh, when you go to sell it, it’s, uh, it’s an unsellable company. It’s not transferable. Uh, and that’s it’s a pretty, pretty big hit, uh, for a lot of people. We know a lot of, uh, business owners that have gone that have gone through this path. Some of them are our clients, where they go to a broker or M&A professional and, and they get a number back that they’re not happy with, um, with a low valuation or the broker M&A person says, I can’t sell it. It’s an unsellable business. So that’s kind of what inspires us to to do the work that we do is we really want to combat those numbers and make sure that business owners have a sellable business, uh, that can really fund, you know, most of us don’t actually retire, but can fund the next venture of [00:03:00] their life. Uh, so that’s that’s what we’re really looking to achieve. Yeah.

Simon: [00:03:05] And I think one thing to add maybe to that is the reality that most people and most business owners don’t actually engage in this conversation until they’re, like, really close to the exit. So, you know, we always say, yeah, if you’re looking to sell within a year or two, there’s maybe a little bit of like lipstick we can put on it when we when we work with them. But your business is where it’s at at that point versus if you start being aware of what makes the business a sellable asset or what makes what is allowing you to have options to then transfer it or whatever you want to do with it and you have enough time to build towards that is a whole different thing than the disappointment of you. Just assume something to be true about the value of your business, that you’re not fact checking until you know 1 or 2 years out, and then you’re realizing, oh my God, I’m actually not where I want it to be. Um, [00:04:00] yeah.

Steven: [00:04:01] I’ve, I’ve joked about, um, well, I guess joked isn’t the right word, but talked about how business owners will go and a lot the perception of selling a business is like selling a house. You go to an agent, you say, hey, I want to list it for sale. And then, you know, in Colorado it’s bought the next day. Um, but that’s what a lot of business owners think. The reality is of of selling a business. And it’s, it’s actually a much, much more complicated process than that. Uh, so we’re we’re here to shed the light on what that is and what an acquirer looks for, and try to plug the holes and increase the value of the business. So it, uh, the business owners are not met with that disappointment.

Simon: [00:04:43] Yeah, well, let’s let’s start there. What is what is one of the tools that we use to kind of like do an initial benchmarking of where a business is at on their journey of value, and then on their journey of actually being a sellable. Asset. [00:05:00] I know at Denver Business Coach, we have a few of them. One of them is the Value Builder questionnaire. And then the corresponding report that comes along with that. Do you maybe want to just introduce that a little bit.

Steven: [00:05:13] Sure. So the Value Builder questionnaire or value builder assessment is a tool we’ve been using for for uh many years. Um, and how we mostly use it is to help benchmark a business, um, understand the estimated range of value of a business, and then also how the business measures up on the eight different drivers, um, of of valuable business. And a lot of what it’s measuring is the risk to an acquirer of acquiring the business. And we talk about it all the time. Risk and value have the inverse relationship of, you know, higher risk, lower the value, lower the risk, higher the value. Um, so it actually works as [00:06:00] a benchmarking tool. And the beginnings of, of an action plan for us when we’re working with, with our clients and saying, hey, you’re really low in this driver, so let’s put together an action plan to, uh, increase the needle, move the needle a little bit more, uh, in this particular area of the business so that we can increase value, decrease the risk.

Simon: [00:06:22] Yeah. I think one thing that I really like about it is because it is broken out in these eight different drivers. It gives most business owners look at their business and they have maybe some understanding of value is is a, you know, a a multiple of EBITDA or earnings or seller discretionary earnings or they have some kind of formula in mind. And so all they’re looking at is really just profitability maybe. And then average, you know, their revenue versus really being able to access the the business through the different lenses of like there’s eight distinct drivers. And so when [00:07:00] we do the assessment we often, uh, you know, help the business owner understand their business in a way that they haven’t necessarily looked at it. And and obviously we do that through questions. And some of those questions are, uh, helping us to, like you said, benchmark where they’re at, but also helping the business owner to start seeing their business through maybe a little different lens than what they’ve been looking at it. And so as, as part of this conversation, we want to maybe zoom in on a few of those questions and just talk about, you know, you know, what is the question and why is it important? And then possibly also what are some things if you’re not scoring high on on the response, what are some actions that you could do to actually, uh, strategically work on your business to improve value and saleability. Um.

Simon: [00:07:59] Yeah, I think [00:08:00] for today we kind of like started out with looking at at customers a little bit. Mhm. Uh, and uh I think I’m going to just start with one of the questions and zoom in and um, Steven I’ll read it to you and then maybe you can interpret it a little bit. Um, in terms of what that means for a business owner. So let’s just start out with the first one. Uh, which of the following best describes the exclusivity of your business to your customers? Uh, option one is we sell a commodity product or service that our customers can get from many other suppliers. Option two we sell a product and service that our customers can get from a few other suppliers. Option three we have a niche product or service that is unique in the marketplace, so our customers would have to work hard to find a supplier that provides what we’re selling. Or number four, we have a monopoly [00:09:00] on the service or product that we sell. So how does that tie in with value and saleability of a company?

Steven: [00:09:08] Yeah, it’s it’s it’s a great question. And you know, I think, uh, when most people hear that question. Monopoly like they think is something.

Steven: [00:09:22] Or gas or something, something that, uh, or, uh, you know, Xfinity in Colorado, um, and they, they think, oh, I’m not a business that’s ever going to have a monopoly. Uh, on on the what I sell. I’m a I’m an electrician. There’s hundreds of those. Uh, and that’s not necessarily what we’re talking about here, too. It’s it’s really about the differentiation that you have within the marketplace against your competitors. So, you know, you might be an electrician and everyone can work on, on a, on an outlet or, you know, [00:10:00] install a ceiling fan. Um, but what other value are you bringing to the table? And the idea here is, and how to compete in your marketplace and really separate yourself from, you know, all other electricians and say, I’m over here is to increase to to add more value to what your customers are getting and however form that is that you can figure out. It’s not saying, oh, I’m an electrician and I, I will have a monopoly on providing electrical services. It’s it’s saying, you know, what additional value, what more can I bring to the table than my competitors are not doing? Um, how can I show that I am just so much more different that it’s it’s apples to oranges instead of apples to apples when a customer is comparing your business to another.

Steven: [00:10:52] So that’s kind of the angle that I will take with this particular question of, um, you know, how are you [00:11:00] using technology for I’m going to stick with the trades area. It’s, you know, are you using a GPS locator when your customers are expecting you to come in and they can track it like they can track an Uber Eats delivery driver? Um, that’s huge value that your competitors aren’t going to be able to do. So in that sense, if no one else is having that GPS tracker, for instance. You’re kind of a monopoly in that sense, is you’re providing so much more value that your customers see their perception of that G.P.S. tracker, for instance, is just putting you in a class of your own. So you’re really just, uh, the question revolves around how are you competing in the marketplace? And we just want to figure out how you can separate yourself from the rest. That’s my take on it.

Simon: [00:11:46] Yeah, I think we see that a lot in the trades. Like, uh, examples would be like having very narrow arrival windows, for example, for, for services rather than the do you want us to come between 8 and 1 p.m. or, you know, [00:12:00] or 1 p.m. and 9 p.m.. Um, or also and then I think one thing is actually having a unique selling proposition or something that sets you apart. And then the other is, how well are you doing in communicating that, that value proposition as well? And does your, you know, you can have a whole set of like, you know, master electricians and you’re the only company that has only master electricians working potentially. But are you actually articulating that or do people find out, you know, like, um, after the fact or it’s really not used as a, as a value position? So, so as it then relates to how does it impact the, the value and the ability of the business, where does the business want to rank ideally on that scale? Of those four different answers.

Steven: [00:12:51] Definitely further away from the commodity answer, uh, you know, an acquirer is going to look at the business and say, um, [00:13:00] they’re going to look at the business that they’re they’re looking to buy, and they’re going to look at the industry and they say, what really makes you different? And and also how difficult is it to make, uh, make that big of a difference, increase the value, that sort of thing. Because the other option that isn’t talks about is starting their own. Um, so if if you’re competing it truly in a commoditized market and no one’s differentiating and you’re just the exact same as the next guy and the low barrier to entry, all that, um, what’s what’s to keep someone from starting their own version of it as well, you know, as opposed to buying your company, because that’s always going to be an option to. Yeah. Uh, and they’re going to see if you’re if you’re comparing or if you’re, if you’re being more of a commodity, uh, closer on that end of the spectrum, you’re naturally going to compete on price. Uh, and, and when you once you compete on price, you discount, discount, [00:14:00] discount until there’s nothing left and that’s, that’s a, an owner coming into or an acquirer coming into a business and seeing that’s how they’re competing, that’s how they’re able to win business. The work that they would have to do to actually create value and say, that’s not us. It’s it’s a lot. Um, so to continue to innovate, to continue to separate yourself, to continue to figure out how you really are differentiating within the marketplace by, you know, using technology or communication or, you know, however that is, that’s that’s a growth indicator, um, showing that a potential acquirer is, hey, we kind of figured out this innovation component. We are going to we’re continuously separating ourselves from the rest and acquire is going to stick a way higher valuation on that type of business than, you know, electrician is the same as this one. The same as this one is the same as this one.

Simon: [00:14:54] Yeah. I mean, we’ve and this is probably a whole different conversation. Or the higher the differentiation [00:15:00] is, the more you can set your own pricing, the more profitable it is. And that just becomes a perpetual circle where you can then reinvest money in, in marketing or innovation and things like that as well. Um, okay. Great. So let’s maybe let’s take one more question. Yeah, I, I love this question because I always think it kind of like surprises, uh, existing business owners. Uh, let’s go with which of the following best describes your personal relationship with your company’s customer? Um, number one, I know each of my customers by first name, and they expect that I personally get involved when they buy from my company. Number two, I know most of my customers by first name, and they usually want to deal with me rather than one of my employees. Number three, I know some of my customers by first name, and a few of them prefer to deal with me rather than my employees or number four, I don’t know my customers personally and rarely get involved in serving an individual customer.

Steven: [00:16:01] Everyone by by first name. They want to deal with me. I’m the best. Uh, that’s the answer that that business owners a lot. I would say 80% of the business owners I’ve talked to are proud of that. I say, yeah, everyone wants to deal with me. I’m the owner of the company, uh, and in actuality, and acquire sees that as a very high risk in a business and will significantly devalue the business because of that. Um, it’s a very, very good indicator indicator that, uh, the business owner is the star of the show. And the question becomes, is there a business without the owner? So the the best answer there is, I know no one, none of my customers, they don’t want to deal with me. Uh, they don’t know my name. Um, to to be able to separate yourself from the operations of the business from customer facing situations. That’s [00:17:00] what’s going to drive, um, is what’s going to award a higher multiple for the business.

Simon: [00:17:07] And I think, you know, so some of it is, you know, ego in a certain way where a business owner wants to be involved and they take pride of being the one who knows and can solve problems. But also for most businesses, it’s it starts out like that as a necessity, you know, because you rarely does an electrician start out with a like we talked about a new monopoly or a crazy unique selling proposition, uh, where they really differentiate themselves in the beginning. So a lot of it is through personal relationships, really catering to the client, hoping for repeat business or for referrals. So being very hands on with the customer they’re serving and and that kind of like carries through and that gets them to a certain level of success also that they, they might not have the funds for marketing or for, for more leverage client acquisition strategies. And [00:18:00] so but there’s a real letting go that needs to happen at some point to position your company really for a successful exit. Um. And and a lot of it is, is very emotional too. And like like we talked about there’s sentiment. There’s a little bit of ego involved and trust, I think, like the ability to delegate to their employees in a way that they will take care of the customers and the company the same way that they would, the owners would. So, yeah, we usually get a lot of surprises out of that. Like, why is that? And I love that. But that’s really the mindset shift of, are you looking at a company through the lens of an eventual exit, and what do you need to do? Or are you just looking at I want to keep having really happy customers. And you actually. It’s, like you said, have an inverse, uh, effect on on [00:19:00] value and saleability.

Steven: [00:19:02] It, you know, to for for business owners. Um. That. They’ll step in when there is a problem, when it gets escalated, when they have a team and you know a customer has an issue with whatever service or product that that they’re delivering. And, you know, maybe the team internally, uh, turns to the owner and the owner automatically steps in and says, I’ll solve this, don’t worry. Um, that’s a that’s a. A good indicator also within this question of of the owners involvement or unwillingness to let go too. So instead of saying hey, customer service representative or whatever. Um, this is how I would handle the situation. This is how you go back to the client, go talk to him about this x, y, z. Do do this, do that, and then let them handle it. That’s more of that that [00:20:00] component of of a business owner really empowering their their their employees and trusting them to, uh, take care of the situation if it needs to escalate to the owner, it needs to escalate to the owner. But we got to try that first instead of the owner. Just saying I got it. I’ll step in. Um, and that’s that’s another indicator that I think does speak to this question a little bit too.

Simon: [00:20:25] I mean, I see that. Literally. Today I had a conversation where. The justification for not empowering the employee is we’re behind. We need to get caught up. It’s much faster if I do it myself. And so but that’s that never changes in a certain way, right? So it’s just another version of no. At some point you got to put on the brakes a little bit and really spend time with your employees and your team helping them, uh, solve problems and only escalate [00:21:00] when, when it absolutely needs to. Yeah, yeah, yeah, I love that. Okay, good. I think for today, those were two really important, uh, questions to consider. I hope this was, to the listener, helpful and provided some insight and maybe some new perspectives. More to come. And like we said, like our goal really is to to bring this conversation of how to build a valuable and eventually sellable company front and center, even if you’re like ten years out. But having those kind of, uh, understandings and start thinking along those lines is just going to make all the difference in and help you ultimately liquidate and take possession of the asset that you’re building rather than just seeing it evaporate, unfortunately. And yeah, thank you, Stephen. It was a pleasure.

Steven: [00:21:51] Thank you. It was fun.

Simon: [00:21:53] And, uh, we’ll be back.

Steven: [00:21:54] Yeah. The next one.

Simon: [00:21:56] Take care guys.