The holiday season is upon us. Hope you have a wonderful holiday season and enjoyed time with family and friends.
While we often use this time of year to express our gratitude and give thanks, I have, in recent years learned that it is important to express gratitude on a daily basis. Expressing gratitude daily, whether verbally or in a “gratitude journal” can change your life and make you a happier person. Indeed, you will see improvements in all aspects of your life – career, social, health, emotion, and even personality. I mean, really, who wants to be a “Debbie Downer” or “Negative Nancy?”
"Gratitude is the healthiest of all human emotions. The more you express gratitude for what you have, the more likely you will have even more to express gratitude for.” - Zig Ziglar
I have certainly found this to be the case. By expressing gratitude daily, I have become a happier (just ask my husband), healthier, and less materialistic person with deeper relationships with my spouse, family and friends, am more productive and am definitely less stressed. If you are interested in learning more, check out this great post on 31 benefits of gratitude. You too can adapt the “attitude of gratitude.”
Expressing gratitude doesn’t take much time at all but can have huge benefits!
Read on and you will learn about the Four Cs that can enhance value in your business. You will thank me later! Best of all, you don’t even have to break a sweat!
Welcome to my newsletter. My goal is to provide useful and purposeful information to you that will help you navigate change in your business, whether transitioning from your business or needing to increase value in your business.
Manage the Four Cs to Increase the Value of Your Business
Last time, we learned that one of the major reasons, most businesses never ultimately get sold is because of what is known as the “value gap” – the difference in what a business owner thinks the business is worth and what a potential buyer is willing to pay. Treating your business to a business valuation can help identify the gap and the things you should address in order to extract the most value from your business.
When it comes to making their business more valuable, most business owners ultimately think they need to get bigger, i.e. increase sales. If you are a startup, sales growth is a must. But if you are an established business, there is a lot more you can and probably should be doing to enhance the value in your business before increasing your top line revenue.
What really drives value in a company is not the value of its tangible assets (think equipment), but rather the value of its intangible assets –aka “goodwill” or “blue sky”. Yet, business owners get little feedback or even know how to manage the intangible assets of their business and as a result end up leaving money on the table when they sell their business. Intangible assets can be classified into what Chris Snider, CEO/President of the Exit Planning Institute and exit planning industry thought leader, refers to as the Four Cs.
Human Capital
Customer Capital
Structural Capital, and
Social Capital
If you think about the most valuable companies in the United States today (Apple, Google, Facebook, McDonald’s, Coca-Cola, just to name a few), their value is largely derived in from their brand and intangible value. Think McDonald’s systematic way of making a hamburger (structural capital) - hamburgers are made the same way in every McDonalds. Or, Coca-Cola’s secret formula (also structural capital) which makes Coke what it is. Remember the public outcry in 1985 when Coke changed the flavor during the Cola wars? This had an impact on their social capital.
Without knowing too much about the Four Cs one can easily say that each of the companies referred to above have strong human, customer, structural and social capital. Let’s take a look at each of the Four Cs more closely.
Human Capital
Human capital, as the name implies, refers to the people you have in your business. Don’t get me wrong, it is not just about having employees, but having the right employees. Ask yourself the following questions:
Do I have a management team?
Do I have the right people?
Are the people I have talented and strong for their position?
Can the business run without me?
If you answered yes, then congratulations! Someone may pay you more for your business than for a similar business without human capital. If you answered no, then you have some work to do.
Developing human capital, should be your highest priority; yes, even before any other strategy you implement in your business. This means “getting the right people on the bus”, making sure they are in the right position for their strengths and talent, and making the right (but sometimes difficult) decision to let go of the wrong people. Developing human capital for your business is an exercise in recruiting, motivating, retaining, and evolving (growing) and when done diligently can have profound impact on an organization.
Sadly, human capital is the last place business owners want to focus. Why? Money. It is the old chicken and the egg theory – “we need to increase our revenues before we can “afford” to attract and hire better people.” They couldn’t be more wrong. You can have the best strategy in the world, but without the human capital to implement it, you will get so-so results or no results at all.
What are you doing to improve human capital in your business?
Customer Capital
If you think the sole purpose of your business is to make a profit, think again. The purpose of any business is to create and retain a customer base and the failure to attract a sustainable number of customers to your business will ultimately lead to its failure. So how do you know if you have strong customer capital? These are the questions you should be asking:
How strong are the relationships I have with my customers?
Are the relationships I have with my customers longstanding and/or contractual?
Do I provide a product or service to my customers that is an integral part of their business?
Is my customer base well diversified?
Is my customer base transferrable?
Answering yes to all or most of these questions means that your business will command a higher value than a business that say relies heavily on the owner (i.e. you) to get customers, service those customers and/or are non-recurring, one-off transactions.
One thing that I frequently see in businesses is a high degree of customer concentration. You are deemed to have high customer concentration if one customer accounts for more than 25% of your revenues. This alone can be a deal killer when it comes to selling your business. Why? Because there is a great deal of risk that the business will not perform as well if this customer/client is lost. So if you think you are doing well because you won a major contract with a large customer, be aware of how this impacts your customer base and customer concentration.
Buyers of businesses pay more for businesses that have recurring revenue – think accounting firms and subscription based models where you can “set it and forget it”. Why do you think so many business have gone to subscription based models? Similarly, business that aren’t reliant on a key person, usually you, will be more transferable. If a customer will only do business with you personally, there is a greater risk that the client might leave post transaction, thus creating more risk and less value on your business.
Is your business too reliant upon you?
Structural Capital
Structural capital refers to the processes, procedures and tools you use in your business that complement your both your human and customer capital. Having these components of structural capital is not enough. If it only exists in your head and the heads of your employees it will easily walk out the door when you or an employee leaves. Ask yourself the following questions:This “knowledge” needs to be well documented in order to make it transferable.
What are the specific processes, technology or facilities that make my business special in what we do?
Are these processes documented such that they are easily transferrable?
Whether accounting processes, employee on-boarding, inventory management, customer satisfaction, or other unique processes (just to name a few), it is in your best interest to begin documenting your processes and procedures. Think of it as creating an operating manual for your business. Focus on the most important processes and procedures first, i.e. the ones that should be documented because they exist only in your head. Not only are you making your business more transferable, but standardizing processes within your business can make your business more profitable today.
Social Capital
Social capital is the most difficult to develop and definitely the most difficult to measure of the Four Cs, but when a company has it, you know it. Social capital represents your culture, how you interact and communicate with your people (employees, customers, community), and how you deliver your products or services. Companies with strong social capital have a strong brand or mojo – think Apple, Google, GE. Their strong social capital is most definitely reflected in the stock values of these companies.
As an owner of a small or midsize enterprise, you may be thinking: “I will never have the brand recognition of a company like Google.” That may be true, but there is a lot you can do internally to ensure you have the mojo it takes to add value to your business. Ask yourself the following:
Do I have a strong culture in my business?
Is my business well regarded in the community and industry in which I operate?
Is my business visible in the community?
Am I giving back to the community that supports me?
A business with a strong culture that is highly regarded in the community industry it operates will be more attractive to a potential buyer and drive the value of your business higher. Developing social capital in your business takes time – it won’t happen overnight – but can definitely drive value. Once developed, it can disappear in the wink of an eye. Think of the damage the Wells Fargo incurred in their social capital recently amidst allegations of fake accounts and forcing auto loan customers to buy auto insurance they didn’t need. Talk about damage control. Even one you have social capital, it takes a lot to protect and maintain it.
Icing on the Cake
Developing and managing the Four Cs in your business is the difference between getting just the value of your tangible assets (cake) and getting the value of your tangible assets and your intellectual property (icing). Steps you can take now:
Conduct a business assessment as part of your business valuation to identify weaknesses in your Four Cs
Identify those items you can work on now that are easy to implement and will drive value almost immediately – I call this these the low hanging fruit
Implement strategies and actionable steps over increments of ninety days
Reassess and repeat the process
Want to learn more about the Four Cs and where your company stands? Contact me for a free initial consultation. Let’s start working on your Four Cs so that you can have your cake with icing and eat it too! You will be grateful you did.
Want to start working on your transition strategy? Ask me about my Transition RoadMap®. The Transition RoadMap® is specifically designed to help you begin thinking about your business as an outside investor would. Whether you are looking to sell your business or just want to enhance value, the Transition RoadMap® should be part of your overall business strategy. Learn more about the Transition RoadMap® here.
Ready to get started? Email me or call me at 970-389-4802 for a free initial consultation.
Stay tuned.
Next time we look at the importance of transfer-ability when it comes to selling your business.
Have a great month!
ETS Compass is my personal newsletter that provides thought-provoking topics and helpful guidance to business owners looking to navigate change in their businesses. Whether it is value enhancement or transition planning, it is my goal to educate you.
My goal is to provide useful and purposeful information to you that may help you transition from your business.
Author: Sheryl Brake
Sheryl is the CEO and Founder of Encompass Transition Solutions, LLC and former partner of a top 25 national accounting firm. She has been working with business owners in a wide variety of capacities for more than 30 years. Sheryl lives in her home state of Colorado with her husband, Michael.