Value Builder Driver #3: The Switzerland Structure

In this episode of the Business Owner Breakthrough Podcast, Pete Mohr discusses the importance of the Switzerland Structure, which emphasizes making a business independent from any single customer, supplier, or employee. He highlights the risks associated with customer dependency, supplier dependency, and employee dependency, and offers strategies to mitigate these risks. The conversation also explores how buyers perceive businesses with these dependencies and the importance of exit planning as a fundamental business strategy.

Takeaways

• The Switzerland Structure promotes business independence.
• High customer dependency poses significant risks to business stability.
• Diversifying customer relationships is crucial for reducing risk.
• Establishing multiple suppliers can safeguard against supply chain issues.
• Cross-training employees helps avoid single points of failure.
• Investing in technology can enhance business scalability.
• Buyers prefer businesses with low dependency risks.
• Documented processes ensure continuity in operations.
• Regular assessments can help identify areas for improvement.
• Exit planning should be integrated into overall business strategy.

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Transcript

0:00

Welcome back to another edition of the Business Owner Breakthrough podcast. It's our value Builder series. And today we're talking about the value driver number three, which is the Switzerland structure. And it's all about making your business independent from any one customer, supplier or employee. And Switzerland structure may sound like an odd name, but it's really got to do with the fact that much like Switzerland's independence in the world, in world politics, our businesses aren't reliant upon any one customer, any one supplier, or any one employee to any significant extent. And you can only imagine really here that independence matters because businesses that are reliant on a few key relationships are considered risky by buyers, and it essentially devalues your company over the period of time. I mean, so long as that relationship is strong, we've got a great business here. But think about the fact that to any potential banker, any potential purchaser of the business, whatever the case is, if those relationships break down, think of the risk involved there. So we always want to try to be de risking our business in order to create value. So these are the reasons why we're going to chat a little bit here about the Switzerland structure. Today, a more balanced business with diversified relationships really is just far more attractive and valuable to potential buyers. Let's talk first about the customer dependency side of things. You know, if a large portion of your business or revenue comes from just a handful of customers, your business is highly vulnerable. A lost contract or a deal could really cripple your company in so many ways, whether it's cash flow. We talked about cash flow, we've talked about a lot of these different pieces. But if you lose a key customer, and that key customer represents, let's say, 50% of your business. Let's say you're a manufacturing plant and you work for two automobile factories and, you know, 50% and 50% and one of them goes down, that could be crippling. The idea here is that we want to really be narrowing it down to somewhere between 10 and 15% for each of these three dependencies, because the next one's supplier dependency. And you can imagine if almost all of your raw materials or whatever it is you're bringing in for your business is really dependent upon one key supplier, the relationship could crumble there, too. And it's not only always the relationship. Sometimes you really don't know what's going on within that business. And if they're struggling, and you don't know that, that could be a problem for you because eventually it's going to cause issues with you and your supply chain of all the things you need to do in order to fulfill your promise for your clients and it creates value issues. Buyers will see this as risky, especially if these supply chain issues have arisen in the past and you know, are repeating again. It's a problem. So you want to make sure that you have alternate source of supply for almost any of your key items as often as you possibly can. And then the third one, the employee dependency. And having one or two key employees that hold critical knowledge or relationships puts your business at risk if they leave. Especially if you don't have documented process cross trained employees underneath them that know how to take care of business when they're not around. As part of your process build and process management, these are the things that you need to be looking at to ensure the value of your business remains what it should be. And look forward to the future. Because you know what? Eventually employees do leave sometime down the road and at that time it will need, will need to put these things in place. So we need to have them ready to go. Now. It's the same as we talked about earlier on in this in the podcast series here, that 50% of business owners get ready to sell their business and have a transition of business. And the other 50% of business owners sell because they have to. Well, certain times employees leave because they have to. And if we aren't ready for that, that's a problem. And your buyers will see through that. They'll see it in due diligence. They'll see what everybody's accountable for or not accountable for. And they'll want to know that. And it'll either raise the value of your business or it will take down the value of your business. So what are the strategies to reduce dependence? Well, of course you want to diversify your customer base. Work on expanding your client list so that no single customer account is more than 10 to 15% of your revenue. And I'm in retail with our shoe stores, so that certainly isn't the case with our shoe stores. But I know in my service businesses in the past we used to have clients that did make up 10 or 15% of your revenue. And anytime there's any strain on that relationship, it can cause issues. So, and if it's more than that, it cause even larger issues. And then you get into staffing and all the other things that roll around it. So number two is establish multiple suppliers. So as often as you can, don't rely just on one supplier for critical components. Build backup supplier relationships or even Consider vertical integration where you're taking care of it yourself, if that's feasible in your business. Number three is to cross train your employees, as I mentioned a minute ago, but avoid single points of failure. I mean, if you ensure that multiple employees can handle key responsibilities and the processes in place and the accountability is in place and everybody knows what they need to do when people are absent all that kind of stuff, it really reduces the risk of one person holding too much power or knowledge. You need to build robust documentation and processes really to ensure the continuity even when and if employees leave. Number four, invest in systems and technology. Automate as much as you can. Reduce the dependence on specific individuals and make your business more scalable. We talked about it last week in the Growth Module. And if you can implement a CRM system or POS system or things that track customer relations so that the knowledge isn't just in the heads of a few key employees or maybe just in the head in your personal head as well as the business owner or leader of the business, that is an important piece. So now I want to put you in the head of a buyer of your business. You know, how do buyers see this setup in your business? Well, I can tell you that they are much more willing to pay for a business that doesn't have risky dependencies because it offers stability and predictability. And that's what people want in their investment. Right? Buyers are going to look at the distribution of your customer base. They're going to look at your lifetime value of your customers. They're going to look at the length and longevity of your employees. They're going to see how long you've been dealing with your clients. They're going to want to see your contractual agreements with your suppliers and they want to make sure that they're solid, rock solid, so they have the ability to clearly see what their future is going to look like with the systems, people and process that you have in place. So I'm going to ask you to take a hard look at your business after this little chat here today. And do you have clients that are more than 10 or 15% of your business? Do you have suppliers that represent more than 10 or 15% of your business? Do you have key employees that are making a lot of decisions that you don't know how they're being made and there's no process in behind how they're being made and nobody else can make those decisions? It's one thing if it's you, it's another thing if it's your team as well. So, I mean, part of delegating effectively is making sure that every position can be filled, stepped up to and done, as opposed to just yours. One of the best things that you can do to start off here and get a benchmark for all of these value drivers is just to head over to theexitreadybusiness.com that's theexitreadybusiness.com and click that green button that says Value Builder Assessment. It will give you, as you go through, it takes about 15 minutes. It will give you a benchmark of where to start. It rates you and lets you know how well you're doing in some of these and the other areas that you need improvement on. And you can't make improvement unless you know where you're starting from, Right? And you can't measure it unless you know where you're starting from. So I think that's really just a great spot to start as we roll through the Value Builder Assessment series here and next week, we're going to talk about number four. It's the valuation teeter totter and how balancing profitability and cash flow can really make your business more valuable to buyers. Remember, exit planning is just good business Strategy. Whether you're 1, 2, 5, 10 or 20 years away, it's something that you need to make part of your business decisions, your business thought process and the things that you do as you move from operator of your business to owner of your business. Now go and make it a great day.