Every valuation report I write ends up somewhere. Some are read from cover to cover, argued over and used. Far more, I suspect, end up in a bottom drawer, filed by an owner who read the summary and assumed the rest could wait.
It can wait. But it rarely waits quietly.
› Seven words
Near the back of many of the valuations I author, in the table of strengths, weaknesses, opportunities and threats, sits a line that appears in more of my reports than I would like. It is seven words long.
High reliance on owner for operational continuity.
It does not read like a warning. There are no red letters, no exclamation marks, and it might even be missed more often than not. It reads like what it is: a measured observation that too much of the business lives in one person’s head.
Sometimes, it might not even be the owner.
› The keys on the desk
The line rarely matters on the day it is written. It matters later, and it seldom announces itself.
Imagine a foreman of fourteen years, the one who knows which suppliers always run late, which machine sulks on a cold morning and which client needs a call before they have to ask. Lets say he places his keys on the desk one Friday arvo… He is not angry. He is simply done. The business cannot stop; the saws have to keep running. But fourteen years of knowledge that was never written down has just walked out the side door with him.
That is the moment the owner discovers what the seven words really meant. They were never a criticism. They were a documented risk, and the risk has just come due.
› Warm and cold
Ask most owners what protects their business and the answer is the same: our relationships, our reputation, our years of goodwill. None of that is wrong. But none of it is a competitive barrier either.
Relationships are warm. Barriers are cold.
A relationship lives with a person, and leaves with that person. A barrier stays with the business: a documented process, an exclusive supply arrangement, a certification competitors cannot quickly acquire, knowledge that has been written down rather than carried. On our Strategic Position Matrix, that is the difference between Position Five, where a business competes with the same resources as everyone else, and Position Four, where it owns something a competitor cannot replicate with a telephone call and a trade account.
The encouraging part is that knowledge held by people can be converted into an asset held by the business. In practice the conversion looks like this:
- What the key people know is in writing: the supplier quirks, the client preferences, the sequence of the job.
- Key roles have their authority in writing, so good people stop waiting for permission to do what they already know is right.
- Important client and supplier relationships do not live in a mobile phone.
- The business measures a small number of things that the whole team sees and understands. Three is plenty to start.
None of these costs much. Each of them moves value out of one person’s head and into the business, which is the only place a buyer can find it. So, take the last valuation report out of the drawer and read the SWOT analysis again.
But here is the uncomfortable question. If your most important person placed their keys on your desk tomorrow, what would they take with them?
› A stage, not a failing
In 1983, Neil Churchill and Virginia Lewis mapped The Five Stages of Small Business Growth in the Harvard Business Review. Among the factors they found shaping whether a business could grow beyond its early stages was the owner’s “managerial ability and willingness to delegate responsibility and to manage the activities of others.”
That deserves to be heard plainly. Reliance on the owner, or on one key person, is not a character flaw and it is not a management error. It is the natural shape of a business that grew around one capable person. The difficulty arrives when the business outgrows the structure it was built on, which, sooner or later, it always does.
› A word to the advisers
If you are an accountant or solicitor, you may well hold a copy of my valuation report on file. You may even have been in the room when it was handed over. I have heard it said that advisers hesitate to raise operational matters with a client who is, on paper, doing well. I understand the hesitation. But the seven words are far easier to discuss three years before a sale, or a key resignation, than three weeks after one. And a client who acts on them owns a business worth more when the time comes.
› Consider this
A buyer does not pay for what the business earned last year. A buyer pays for confidence that the earnings will continue when the people who produced them are no longer in the room.
Consider this: the seven words are already written about most businesses. The only question is whether the owner reads them before the keys sit on that desk, or after.
If you would like to know what your last valuation report was trying to tell you, or where your business sits on our Strategic Position Matrix today, a confidential fifteen-minute conversation costs you nothing. Call Kevin Lovewell directly on 1300 551 757.
