Don’t look where you fell, look where you slipped is a favourite African Proverb.
Listen to this podcast from The Money Show where Pavlo Phitidis unpacks why this resonates with him in regard to many business owners he works with:
It came to life after 2 consultations with 2 different business owners today.
The first business owner, in his 50’s has built a remarkable business in a commoditised market. With a $30m annual revenue, he has generated a solid income for himself and the partners. They now want to monetise their 32 years of investment and risk through a sale. This would allow them to enjoy the capital gain that would be their greatest wealth generating instance. But the market does not see their value. After a due diligence from a prospective acquiror, it was evident that the partners hold and own relationships that are responsible for 56% of annual revenue. The uncertainty that these relationships would remain in play after they sold, led to the acquiror discounting their asking price by a hefty 60%.
The second business owner in the security sector is in his late 30’s. Over the last 5 years he has built a very smart, tech-based solution for the eventing industry. Specifically, it is suited to big entertainment, sports, and political events. Recently, his business took off. But his clients, on the back of big, medium-term contracts, insist on his presence at the events, even though he needn’t be there for the service to function and perform. He wants to work with Aurik to resolve this problem. We’ve agreed to help. It’s a problem we have solved many times before. Today was the third postponement of our first session. But the news, like last time, is all good. He is overwhelmed. Having just signed on 3 new stadia and bidding with a high likelihood of success for the Olympics, he urgently has to deal with client needs. Urgent, but how important? This path will lead to the same problem faced by the first business owner – is the business an asset or is it a job?
Starting and building a business needs you at its core. It’s you that needs to learn what works and what doesn’t and through that, find a path to establishment and growth. Transiting from your daily direct leadership to a team then becomes essential. This is where many fail and 5,10,20 years on, still remain front and centre of the businesses sustainability or growth. So how do you get it right? And when should you act to get it right?
Once you have traversed the first 3-5 years of start-up, the time to transfer relationships, processes and responsibilities becomes essential. Should you opt not to or fail to do so successfully, you are building a job, not an asset. You limit the scope of your business’s potential, limit the opportunities to attract driven team members and fail your own future wealth creating instance.
Urgent and important are different. Urgent mostly means that you are being led by other people’s agendas. A client must be responded to. But you have full control over which clients you have, the promises that are made and how you build your business to operate without you. That’s the important, strategic, structural stuff of turning a job into an asset. Put differently, building a business that can be successfully sold in the future to become your greatest wealth generating instance.
Growth carries great weight! The weight of winning it, the weight of servicing it and the weight…of understanding and leading it! Without it your business is on a death curve. It will harm your income growth, customer acquisition and retention, team and supplier relationships and your opportunity to one day exit your business. Think of it like a President who has lost favour with the party and population – nobody wants to stick around a lost cause!
Listen to the Money Show podcast of the discussion Pavlo Phitidis had about the 2 types of business growth:
Business growth is a system of activities, integrated to create an outcome. It doesn’t come from the product or service your business offers. It comes from the organizing the functional, commercial activities of your business into a single system. Marketing generates new leads, sales convert them, operations fulfil and service them and administration coordinates them – all work as a single system to create a great experience that customers than promote. The product or service you offer is what solves the customers problem; the growth system is what creates a good experience in having that problem solved for the customer.
You can build a ship to sail fast or slow. You can build a building to be small or tall. It all comes down to design. Being clear on what you want to achieve in your business lets you design the right system to achieve it. When building an Asset of Value™, design is premised on your companies positioning in the market. Once clear, a System of Delivery (the commercial functions optimized and integrated into a single system of coordinated activities) enables your positioning. With these two layers in play, you can then direct and organize your team to power and lead the system implementation. This generates two outcomes. Organic growth and time; time to lead next level growth.
This is growth that sees your business grow revenues on a consistent, reliable basis, largely without you. The rate of growth depends on several elements including country GDP growth, sector and industry growth, life stage of your business amongst others. For example, if your country growth rate is 3%, your sector and industry is forecast at 5% and you are a 7-year-old business, you should look to secure an organic growth rate around 15-18%. If you are a 30-year-old business, you might adjust it to around 12-15%. Remember, this is growth that occurs largely with out you. It is driven by the System of Delivery and your team and is premised on your positioning.
With organic growth in play, and most valuably, your time released from daily operational activities, you need to turn to next-level growth. As the term suggests, next level growth sees a significant increase in revenue coupled by a moderate increase in costs. The level up is felt in profit as the “yawn” between revenues and costs widen.
The “yawn” is an essential indicator of next level growth. Ramped up revenues that are tracked by ramped up costs grows your business. It also grows complexity, points to a failure to scale effectively and increases your risk.
In an Asset of Value, next level growth that yields the “yawn” is gotten by finding opportunities that maintain the positioning of the business, require little adjustment to the System of Delivery and don’t stretch your team way beyond current levels of comfort and capability. These opportunities can be in new product development, new market entry or acquisition, new investment in plant, equipment, space, digitization, marketing, and talent.
Essential, vital, critical to the choice we make as business owners (and the single biggest investors in our business) is not to stall or disrupt organic growth. Landing a next level growth opportunity that stalls organics growth simply pulls you back into daily operations and takes your eye off the opportunity, further exposing and risking your business to harm.
Growth, the history of growth and the future promise of growth are one of the biggest factors impacting your business valuation. A buyer or investor into your business does so either because they see growth potential unrealized in your business and will offer you a few dollars, or because the growth in the business makes it worth man, many more dollars. My first few business I bought were priced at a dollar each. They had served their founders well over the years and time had made them complacent. The complacency was fatigue which came about because of 30-40 years of running a business that centered around their everyday involvement in daily/weekly operations. Without them there, there was no growth. That was obvious to me and the bargain price of dollar had liabilities attached to it plus no growth. A fair price…. right?
Business growth suggests opportunity to talent. Everybody wants to attach to a winner. Is also suggests value to customers, growth to suppliers. It holds the promise of growth in turn to funders. All are roll players in further driving your growth.
Your business growth is never yours alone! It also attracts unwanted attention from competitors if you become complacent because of it. Complacency, a sense of “having arrived” reduces vigilance and the relentless attention to growth that sustaining it requires. Competitors entering your domain, when vigilant, provide opportunities to invest in sustaining innovations and further can educate and grow a market of customers that your incumbent leadership can access too.
If you are not growing, you are dying. Pursuing growth without having built or designed your business to sustain itself risks everything. The goose that lays the golden egg (organic growth) needs to be solid and secure before you charge ahead into the market looking to become bigger for the sake of it.
Most business owners are so wrapped up in the many challenges of their business that when Pavlo asks them: “What lies ahead?” Their responses are very vague.
The reality is that there are only two destinations for every business: sale or closure. And globally, 94.6% of businesses started, fail to sell.
Many owners believe that because they have built a business that generates good income; that has put a roof over their heads; that creates jobs and has a productive impact in their industry, it will be sellable – this is not the case and the stats are there to prove it!
Listen to Pavlo unpack why we build unsellable businesses, and how to build with a buyer’s mindset in this podcast from The Money Show:
Pavlo’s view is that as business owners we get wrapped up in how we start our businesses – there’s generally very little capital available so all our focus is on generating cashflow to get things going and build some momentum.
In addition, there are usually demands at home that require money, and we build the business around the needs we have to service.
After years of operating like this it becomes habit, and it is very difficult to realise that you’re still doing things the way you did 5, 10 or even 20 years ago.
The starting point is to realise that what you need from your business, when you sell it – is not a credible valuation methodology!
Secondly, as wonderful and unique as you think your business is, there are thousands of businesses just like you.
Valuation is mathematical. The maths compares risk and return across the market. And understanding the levers that can increase or decrease the risk and return in valuation is critical.
Buyers have key questions in their mind when they look at a business.
The questions are designed for 2 things:
Understanding how the buyer thinks, today, will affect how you build the business for tomorrow.
Business growth increases complexity: More customers, more locations, more employees, more suppliers, more money, more inventory and….more risk.
Where does risk come from?
Is there an analogy we could use to understand it better?
Listen to Pavlo discuss a couple of analogies in this episode of The Money Show:
Pavlo argues that using the idea of the chassis of a car – the framework that bears the weight of the vehicle, is a strong analogy for building the framework of your business to support increasing complexity.
In a business, the chassis is everything that is needed to consistently deliver to their customers, to solve their problems. It is all of the systems and processes that you need to fulfil your promises to customers. Your business chassis needs to be strengthened to prepare for the growth that is coming so fulfilment is not compromised as you get more and more customers and orders.
Another way to think of it is how human beings grow: When you’re born, until 20 or so, you grow in spurts. A baby is born, then it grows in height, then there’s a filling out phase, then more growth, and so on. As we grow in height, all the energy in our bodies is going into making our bones taller. Then there’s a lull but during this time the muscles and tissues are building to hold up the next spurt of bone mass. It’s preparing the body for the next phase of growth.
When we find our business in chaos, we need to pause growth to build the muscle to support the growth. Get your systems in order.
Choose a sport that you want to excel in – let’s take shotputter and a long jumper.
The two will be very different to look at. The shotputter will be solid and heavy and strong. The long jumper will be lean and long and flexible.
Figuring out which sport you’re in is the same as positioning your business… it determines every decision from then on.
What they both have the same is internal organs: lungs, kidneys, liver etc. In business these are your business systems. Procurement, finance, HR, operations etc – they are consistent across all businesses.
To take these athletes to Olympic heights, you have to ensure the organs are healthy and functioning optimally. Regardless of their particular sport. And then build the muscles needed to be a shotputter.
Finally – measure that performance to check constantly what is responding well, what is working and what needs work.
This data, both in terms of what is coming down the pipe, and the capacity of the business to deliver on it, will be critical to maintain your growth rate.
Wealth describes an abundance of a desirable thing. It could be friendship, love, money, access to a foodstuff and so on. From the context of a Business Owner, what does wealth mean and how do you create it? In conversation with Bruce Whitfield on 702 and CapeTalk, Pavlo Phitidis defined the three components of wealth creation in the context of a private business.
You are simply the custodian of it for a period. When you make it, you either store it or use it. Stored water eventually evaporates or stagnates. Used money is either wasted or generates more value for you.
In this context, a business should be built as a perennial spring. Well designed and built, it should produce water consistently. Your use of that water should be well considered. Fertilise and feed productive lands that bear fruit. Bad investment decisions see the money made lost like watering barren soil with old seed.
Money in a business takes two forms:
Money in a business sustains and grows the business. the money made needs to cover all your expenses. Thereafter, you pay yourself a salary to sustain yourself and your family. Any money left is profit, which should come to you as dividends or be used to invest in the business to accelerate money-making. This free cash can also be used to deepen the value of the business to generate future money. This happens by increasing the value of the business’s equity.
Equity holds the promise of money. It is in the value of the business should you decide to sell the business. Built right, a business can be sold and for a premium value to generate a capital gain. This will be the difference between the cost of your initial investment to establish the business and the price you sell it for.
As a business owner, you can build a business to either make money or grow equity or both. To get this right, you need to build your business into an Asset of Value. This is a business that has the following criteria:
Building your business into an Asset of Value will see revenue grow at a higher rate than your costs. This gap generates the free cash to make money in the business.
With money made, you need to now make it work for you by growing it.
You can grow it in your business. by making smart investment choices. This might mean an investment into plant and equipment or people and software etc. Many business owners make their biggest mistakes here. Knowing how to invest in your own business is not as easy as it sounds. You can also invest outside of your business into stocks, bonds, shares and other assets. In all cases, these investments must make money for you.
Get smart with insurance and tax management. Insurance, as annoying as it can be, protects you from probable and improbable risks. Imagine, for example, your fleet of trucks gets written off in a fire, without insurance to fund the replacement fleet. It will set you back years if not permanently. Also, some investment products serve to protect money drains like tax. You can legally manage your tax rate down on a personal level by investing in retirement annuities for example.
Wealthy people did not get there in a single generation. Nor did they get there through one activity. Sure, we read about some business people who cracked it and got lucky in a single generation, but they are, by far, the exception. Strategy and habit are what builds wealth. Strategy means being clear on how to make, grow and protect your money. Habit is doing and behaving in this way ove